The Zafirov Decision Could Become a Game Changer for Stark Law Enforcement
By
Mark R. Fitzgerald
Key Takeaways
- Zafirov threatens future viability of whistleblower suits
- Stark law enforcement is predominantly through whistleblower suits
- Third party litigation funding of whistleblower suits is now a multi-billion dollar securitized industry
- Zafirov introduces a new element of financial risk for the industry
Introduction
Much has been written already about the recent decision by Judge Kathryn Kimball Mizelle of the Middle District of Florida concluding that the whistleblower provisions of the False Claims Act (FCA) are unconstitutional.[1] Building upon these analyses,[2] this article examines the practical effects of that decision on Stark law enforcement should Zafirov ultimately be affirmed by the Supreme Court and become the law of the land. To do that, we first briefly summarize Zafirov.
The Zafirov Holding of Unconstitutionality of the FCA Whistleblower “Qui Tam” Provisions
In Zafirov, the plaintiff, a whistleblower suing on behalf of the government under the qui tam provisions of the FCA, brought a claim against her employer, a small physician medical practice with one office, for submitting false claims to the Medicare program by misrepresenting their patients’ conditions. The defendants moved to dismiss the case on the grounds that the qui tam provisions were unconstitutional and the judge agreed.
Judge Mizelle concluded that, notwithstanding the existence of the FCA’s whistleblower provisions since the Civil War, they violate the “Appointments” clause of Article II of the Constitution because the relator serves as an improperly appointed “officer” of the United States (indeed, is unappointed). Judge Mizelle’s decision builds upon a dissent written by Justice Clarence Thomas of the Supreme Court in a different FCA case involving a more technical issue. In that dissent, Justice Thomas argued that the qui tam provisions of the FCA may be unconstitutional, and that the case should be remanded for consideration of these “complex questions.” Judge Mizelle, a former law clerk of Justice Thomas, did just that in her decision in Zafirov.
Whether the Zafirov decision will prevail is still uncertain – the government no doubt will appeal – but there is reason to believe it may as Justices Kavanaugh and Barrett indicated their agreement with Justice Thomas’ concerns about the constitutionality of the qui tam provisions of the FCA. Only one more justice would be needed for the Court to grant certiorari to hear the case, and the Supreme Court recently has shown little reluctance to reconsider issues that for decades were considered settled. That makes it useful to consider how the Zafirov decision might affect future Stark law enforcement.
Exploring the Basis for a FCA Whistleblower Suit Under the Stark Law; the Bookwalter Decision
The Stark law presents a particularly low bar for relators seeking to survive an inevitable motion to dismiss from the defendants. The burden of proving a violation of the Stark law is unlike that of a violation of the anti-kickback statute, which requires proof of wrongful intent, or proof of other Medicare billing violations, which often involve complicated regulations and lengthy manual interpretations from CMS. In contrast, whistleblower suits premised upon violations of the Stark law have a fairly easy test for establishing a prima facie case. In U.S. ex rel Bookwalter v. University of Pittsburgh Medical Center,[3] the third circuit court of appeals set forth the following three elements for a prima facie Stark law violation:
- A referral for designated health services (DHS);
- A compensation arrangement (or an ownership interest); and
- A Medicare claim for the referred services.
The court stated that “[w]hen they are all present we let plaintiffs go to discovery.”
These elements are nearly always present in the academic medical center (AMC) setting (and at most large healthcare systems) because they employ the physicians. The first element is a given, since all hospital inpatient and outpatient services are included within the Stark law’s definition of DHS. The second and third elements are easily satisfied by the employment relationship of the faculty physicians and the inevitable billing of the Medicare program. Consequently, it is relatively easy for a relator to establish these basic elements and then shift the burden to the defendant to prove that it complied with an exception to the law. As the Third Circuit stated in Bookwalter, “these exceptions are affirmative defenses. So once a plaintiff proves a prima facie violation of the Stark Act, the burden shifts to the defendant to prove that an exception applies.”[4]
Adding to this imbalance is the Stark Law’s so-called “bright line test,” which eliminates any need for the plaintiff to prove intent to violate the Stark law. In other words, even if a defendant reasonably believed it had complied with an exception—for example, that the compensation paid was fair market value—the law is violated if the plaintiff can prove to the satisfaction of a jury that it wasn’t.
The only impediment to the bright line test is the plaintiff’s obligation to prove “reckless disregard” under the FCA – that is, the defendants acted at least recklessly in disregarding the possibility that their compensation arrangements with the physicians violated the Stark law. But again, as the Third Circuit noted in Bookwalter, where the defendants had a centralized billing system and were familiar with the Stark law, “they knew” they submitted claims for referred designated health services. All that was left for the plaintiffs to survive a motion to dismiss was to show that the defendants also knew the hospitals and surgeons had an indirect compensation arrangement. This relationship also was easily shown by the fact that all of the provider entities were controlled by a common parent organization. The Third Circuit emphasized that “[o]ur job [at the motion to dismiss stage] is to gauge whether the complaint states a plausible claim to relief …[p]lausible does not mean possible … [b]ut plausible does not mean probably either.”[5]
The Impact of Third Party Litigation Funding on Stark Law Litigation
The low burden of proof that Congress included in the Stark law might be a reasonable policy position where Stark law enforcement is limited to actions by DOJ, because DOJ’s limited resources function as a brake on unreasonable enforcement, but the whistleblower provisions of the FCA can tilt the tables strongly against the provider. If the relator can survive a motion to dismiss without difficulty, even for a case that may not have much merit, the pressure on the provider to settle ratchets up greatly as the costs of litigation and the potential for reputational harm create tremendous pressure on AMCs to settle.
Of course, the government’s limited resources help ensure that it will only choose to bring the most egregious or important Stark cases. And not that long ago, the costs of litigation to a relator were also a powerful limitation on the relator’s continuing to pursue a claim if the government chose not to intervene. In more recent years, however, there has been a proliferation of private equity financing for whistleblower suits that has reduced the financial risk to relators of pursuing a less meritorious claim. A simple internet search identifies dozens of websites offering “easy and fast” financing to relators for whistleblower suits.
Further corroboration of the ready availability of financing for these claims can be found in a report from the U.S. Chamber of Commerce Institute for Legal Reform, published July 7, 2024, which reported that the third party litigation funding industry held an estimated $15.2 billion in commercial litigation investments in the U.S.[6] Hedge funds have created portfolios of claims in which they purchased an interest, and then securitize their holdings so as to reduce risk for investors (much like the mortgage-backed financing industry before the Great Recession). Judge Mizelle referenced this development in her opinion holding that the qui tam provisions of the FCA were unconstitutional: “The government has conceded in the past that the DOJ does not ‘really know the extent to which third party litigation funders are behind the qui tam cases that the [the DOJ] was investigating, litigating or monitoring.’ ”
The Potential Impact of Zafirov on Future Stark Law Qui Tam Suits
Certainly, the Zafirov decision will have a major impact on all FCA whistleblower-based litigation if it is upheld on appeal, because these suits will become subject to dismissal on constitutional grounds. But the impact on Stark litigation might be particularly significant and might be seen well before Zafirov is resolved.
Nearly all FCA claims involving the Stark law are initiated by whistleblowers, not DOJ. A search of the DOJ website for these types of cases identified 30 in total, 23 of which were brought by whistleblowers, and six others that involved a provider self-disclosure (one was unclear as to the source). None of these cases appear to have been initiated by DOJ. These results are not surprising given the low bar required for a relator to survive a motion to dismiss. While we have no information on the number of these cases that may have been financed through third party litigation funding, it should not be surprising if many of them did.
Even though it may take years for the Zafirov decision to be decided upon appeal, the very existence of the trial court’s decision adds a significant financial risk for attorneys representing relators and hedge funds considering whether to invest in their claims. Not only will they need to evaluate the merits of the potential claim, they also will need to consider the risk that the claim will be dismissed even if it is meritorious. How private equity investors might assess that financial risk remains a mystery at the moment, but it will certainly be worth watching to see if Zafirov has a chilling effect on the number of whistle blower claims being brought in the near future.
In the meantime, for most compensation arrangements, the best advice for AMCs trying to reduce their risk of a Stark whistleblower suit is likely to be to lean into their fair market value and commercial reasonableness analyses, and proceed cautiously when using productivity variables that might be seen to correlate with referrals.
Powers will continue to monitor developments in this case and its impact on FCA litigation.
About the Author:
Mark Fitzgerald is a principal with the Powers Law Firm. He has represented AMCs and other health care providers for many years on a broad array of healthcare regulatory and compliance matters including compliance with the Stark and anti-kickback laws, Medicare billing and reimbursement, and voluntary self-disclosure and repayment matters.
This article is for informational purposes and is not intended as legal advice. No legal or business decision should be based on its content.
For questions about this article, please contact Mark Fitzgerald at Mark.Fitzgerald@PowersLaw.com, or Natalie Lorenz at Natalie.Lorenz@PowersLaw.com.