Indictment of two health care lawyers is a wake-up call to the profession This article appeared in the July 1999 issue of the
© 1999 Massachusetts Bar Association
Peter Clark isa Massachusetts assistant attorney general in the Medicaid Fraud Control Unit.This article represents the opinions and legal conclusions of its author andnot necessarily those of the Office of the Attorney General. Opinions of the attorney general are formal documents rendered pursuant to specific statutory authority.
Federal and state indictments of business lawyers inorganized crime and bank fraud cases were not uncommon during the 1980s. Exceptwhen the targets were criminal defense lawyers, the legal profession did notseem alarmed by these cases. But when Ruth Lehr and Mark Thompson, twoprominent Kansas City, Mo. health care lawyers, were indicted on July 15, 1998,by a federal grand jury as part of a health fraud case based upon payments by ahospital to a physician group which controlled up to 7,000 nursing home patients,the health care bar seemed shocked and amazed.
Lehr and Thompson were each indicted on one felony countof conspiracy to violate the federal health care anti-kickback statute, 42U.S.C. 1320a-7b(b), and one felony count of substantive violation. Theallegations against Lehr, 56, and Thompson, 43, seemed to some observersgrounded in the routine provision of legal advice to wealthy institutionalclients and physicians. After all, both lawyers had taken care to provide suchphrases as "full market value" when assisting their hospital clientarrange more than $1 million of payments to the medical group. How could JackieWilliams, the tough, fraud-busting U.S. attorney for Kansas, have chosen totreat leaders of the health care bar like Mafia consigliere?
When, on March 9, 1999, at the close of theprosecution's case, federal Judge John W. Lungstrom acquitted the lawyerson all counts, one could imagine the collective sighs of relief in law officesacross the country. After all, the judge, ruling from the bench, not onlyacquitted but virtually canonized the defendants: "[t]he Court is firmlyconvinced from the evidence presented that the only reasonable inference a jurycould draw is that the lawyers, each in their own turn, attempted to advise theirclients to engage in legal transactions and that these two Defendants did notprepare sham agreements to paper over a fraud but, rather, tried their best toprepare agreements that would reflect what they intended to be legaltransactions into which they believe their clients desired to enter. The stateof the law was in flux; and the lawyers adapted their advice to it as itchanged." U.S. v. Anderson et al.,
D. Kan., No. 98-20030, Tr. 49, 7342-3(March 9, 1999).
The subsequent conviction of four out of five remainingdefendants on numerous felony counts, and the acquittal of the fifth defendantonly because his otherwise criminal conduct fell outside the relevant statuteof limitations, seemed to have little effect on the satisfaction that healthcare lawyers took in the outcome. A close analysis of this case, however, doesnot suggest that prosecutors will, or should, be deterred from including healthcare and transactional lawyers in their fraud investigations in the future.
Doctors Robert LaHue and Ronald LaHue, osteopathicphysicians who owned and operated Blue Valley Medical Group, were a health carelawyer's dream come true. The brothers LaHue and their medical groupserved thousands of patients in hundreds of nursing homes throughout thecentral Midwest. Blue Valley, which also owned a medical laboratory, tappedinto the endless stream of Medicare and Medicaid funds that are available toany licensed medical provider who can complete a claim form. By controlling themedical futures of thousands of elderly patients, each of whose Medicare orMedicaid claims was backed by the full faith and credit of the United States,the LaHues could exert a significant impact on downstream providers such ashospitals who depended upon admissions from nursing homes to maintain theirrevenue streams.
Lehr's resume does not suggest that she was a naivecountry lawyer who stumbled unwittingly into a swamp of complicated governmentregulation. Lehr, of Kansas City, Mo., a solo practitioner who specializes inhealth care, hospital and corporate law, was admitted to the bar in 1979, aftergraduating from Mount Holyoke College magna cum laude in 1964. A member of PhiBeta Kappa, Lehr received a masters degree in 1966 and her J.D. in 1979 fromthe University of Missouri. Her memberships included the American Academy ofHospital Attorneys, the National Health Lawyers Association, and the AmericanSociety of Law, Medicine & Ethics. From 1984 to 1990 she was a director ofthe Missouri Society of Hospital Attorneys, and from 1988 to 1989 the presidentof the Kansas City, Missouri Society of Hospital Attorneys. Her clients includehospitals, nursing home developers, Tenet Healthcare Corporation, and variousindividual physicians and professional organizations.
Thompson likewise does not appear a babe in the healthcare woods. A partner in the Kansas City, Mo. firm of Seigfreid, Bingham, Levy,Selzer & Gee, which has a significant health care law practice, Thompsongraduated from the University of Colorado, magna cum laude, in 1977, and from theUniversity of Kansas Law School in 1980. A member of the National HealthLawyers Association and Kansas City, Missouri Society of Hospital Attorneys,Thompson's practice includes health care law, hospital law, generalcorporate law, and commercial transactions.
According to the federal indictment, Lehr performed legalservices for Baptist Medical Center and its parent corporation, Health Midwest,from 1984; Thompson became involved with those clients in 1990. Among theirservices were much of the bread-and-butter of health care lawyers: advice andconsultation on contracts, loans and lines of credit, the preparation ofconsulting and employment agreements, and purchase proposals. A regionalhospital is the ultimate blue chip client for a health lawyer, a never-endingsource of legal issues, with a steady cash flow to pay the bills. But ahospital depends upon doctors to admit or refer patients, just as a bankdepends upon depositors and investors, in order to generate its revenues. Asthe health care insurance crisis developed in the 1980s creating intensepressures on private health care providers to reduce or eliminate hospitalstays, Medicare, and to an extent Medicaid, patients became the gold standard.With virtually no oversight or utilization review, hospitals could count onpayment, which, while not as high as some private payers, was at leastdependable, and above all not part of the dreaded free care pool or charitycases. Thus cultivation of a source of elderly patient referrals was a naturalimpulse for the managers of any community hospital.
In a simple business context, payment for referrals isunexceptional. Lawyers do it; salespeople and brokers routinely share theircommissions; and finder's fees are staples of financial and commercialcontracts. In medicine, however, fee splitting by doctors has long beenforbidden by medical codes of ethics: "Payment by or to a physiciansolely for the referral of a patient is fee splitting and is unethical. Aphysician may not accept payment of any kind, in any form, from any source… for prescribing or referring a patient to said source. In each case,the payment violates the requirement to deal honestly with patients andcolleagues. The patient relies upon the advice of the physician on matters of referral.All referrals and prescriptions must be based on the skill and quality of thephysician to whom the patient has been referred." Code of Medical Ethicsof the American Medical Association, 1994 Edition, Principle II, Opinion 6.02.(This provision in the same or similar form has existed since at least 1953.See Forziati v. Board of Registration in Medicine,
333 Mass. 125, 127 (1955).)
Nor is the federal prohibition against health carekickbacks a creature of recent contrivance. The statute has existed in essentiallythe current form since 1977; earlier versions prohibited kickbacks but punishedthem as misdemeanors. Nor is the scope of the statute narrow:
(1)[w]hoever knowingly and willfully solicits or receives any remuneration(including any kickback, bribe, or rebate) directly or indirectly, overtly orcovertly, in cash or in kind —
(A)in return for referring an individual to a person for the furnishing orarranging for the furnishing of any item or service for which payment may bemade in whole or on part under a Federal health care program … shall beguilty of a felony …
(2)[w]hoever knowingly and willfully offers or pays any remuneration … shallbe guilty of a felony
One would be hard pressed to imagine a clearer or morecomprehensive prohibition against fee splitting in the Medicare program, or onethat is more grounded in the ethics and mores of the health care profession.
Despite the assertion by Lungstrom that "the stateof the law was in flux," only one state or federal court in almost 20years of anti-kickback prosecutions is on record as agreeing with such a claim.The one court to reverse a conviction in such a kickback case, the 5th Circuitin United States v. Porter,
591 F.2d 1048 (5th Cir. 1979), based its reasoningon a 1977 change to the statute which made the definition of the crime morespecific. The court reasoned that the defendants, convicted under thepre-amendment version of the statute, could hardly be held to have been givenclear warning when even the Congress concluded the statute neededclarification. In addition, Porter et. al. were convicted after a trial inwhich no evidence of scienter was offered.
The holding in Porter was immediately rebuffed by the 7thCircuit in United States v. Hancock,
604 F.2d 999, 1001 (7th Cir. 1979), cert.denied, 444 U.S. 991, which both distinguished and disagreed with the 5thCircuit in upholding the conviction of the defendants. (That court noted thatit had circulated its opinion among all judges of the court in regular, activeservice and that none had favored a rehearing in banc on the question of theinterpretation of "kickback." Id. at 1002, n. 3.)
The next year the 6th Circuit weighed in with UnitedStates v. Tapert,
625 F.2d 111 (1980) which upheld kickback convictions againsta vagueness and due process challenge, stating "[w]e choose to follow theSeventh Circuit in Hancock rather than United States v. Porter
" In 1985,the 3rd Circuit likewise explicitly rejected Porter
and adopted the reasoningof Hancock
. United States v. Greber,
760 F. 2d 68, 72 (3rd Cir.1985). Subsequent decisions have followed this line, the most cogent being the1st Circuit's 1989 decision in United States v. Bay State Ambulance,
supra, 874 F. 2d at 29, which cited Greber
with the comment that the court wasimpressed by the 3rd Circuit's reasoning. See also United States v. Kats,
871 F. 2d 105, 108 (9th Cir. 1989), adopting the reasoning and following theholding in Greber
Also noteworthy is Lungstrom's mention of "thecheckered history of the Hanlester case" as providing furtherjustification for the conduct of Lehr
. The infamous and apparentlyimmortal Hanlester case has become an icon of the health care bar, invoked fora variety of purposes, among them to educate potential clients about the risksof overly aggressive business practices and to justify a depiction ofgovernment enforcement and regulation in the health care field as overzealous,inconsistent and obscure.
Hanlester began in 1989 as an administrative sanctionagainst a medical laboratory that was evading the prohibition on kickbacks byselling limited partnership shares at a nominal price to local physicians. Thephysicians were led to believe that they would receive a return on investmentbased upon their referrals of patients to the Hanlester laboratory. Hanlesteritself was little more than a shell, with the actual laboratory operationsperformed by another entity.
The administrative proceedings were complex, buteventually found that the Hanlester principals violated the anti-kickbackstatute and imposed sanctions. On appeal, the federal district court affirmedthe administrative sanctions. On appeal of that ruling, the 9th Circuitaffirmed in part and reversed in part. Kickback violations by various corporateentities were affirmed. The Hanlester Network v. Shalala,
51 F.3d 1390 (9thCir. 1995).
While agreeing with the government's analysis of thecase, including upholding the government's interpretation of theanti-kickback statute in the context of joint ventures and determining that thestatute was not void for vagueness, the court held that no evidence had beenpresented that the individual principals of the guilty corporations had actualknowledge of the illegal scheme and so could not be held liable foradministrative sanctions. (The Hanlester principal who had actually solicitedthe kickbacks and had also been sanctioned had not joined the appeal.) Despitethe virtual elevation of the Hanlester litigation by the health care bar into aparadigm of legal uncertainty, the ruling in no way suggests that theanti-kickback statute is infirm, vague or confused, nor indeed does it changethe standard for "knowing and willful" violations of the statute.
Lungstrom continued his encomium on Lehr
withthe observation that, in addition to Hanlester's checkered history,"reversals of field by the Inspector General concerning its owninterpretation and the position it would take, … the reservation ofCongress of the safe harbor provision in the Act, the promulgation of regulationsconcerning which were delayed for a considerable time, all invite lawyers toattempt to devise legal ways for parties to have a relationship which has as acomponent hoped-for and anticipated referrals. That's what DefendantsLehr
did under the evidence presented in this case."
Without boring the reader with asides into the arcana ofHHS's interminable processing and drafting of its safe harbor regulationsand the obscurely related Stark I and II regulations, the legal principle atissue here is, as Lungstrom said earlier in his opinion, "very simple… ‘payment for patients is illegal.'" The judge'sconclusion, that Congress, the executive branch, and the courts had"invited" lawyers to violate this principle represents a triumph ofLehr
's defense strategy, which apparently induced theobviously serious and capable jurist to swallow the health law bar'sobfuscation of this issue. While obviously reasonable minds may claim to differon this point, any lack of simplicity in the "no payment forpatients" principal is the result of the health care industry'sfrantic lobbying to create exceptions and special accommodations which permitcertain of the business aspects of their industry to flourish.
The health care industry is the largest single sector ofthe economy, and can be expected to have some weight both before and behind thescenes in government. Having then accomplished much of its desires, therepresentatives of the industry can now claim that the very patchwork of accommodationcreated at its urging has rendered the principle too obscure to enforce. Thiswhining by the rich and powerful regarding the pinch of government regulationis neither new nor confined to the health care industry, and not withoutjustification, given the all too prevalent obtuseness and ignorance of realityand its consequences that are displayed especially in federal regulations. Itis nonetheless discouraging to hear it repeated from the bench, not withrespect to bluff and hearty entrepreneurs, who can be expected to sailuncharted waters in hope of prizes without much concern for legalisms, but indefense of skilled and experienced health care lawyers.
While it may be difficult to tell a valued client that hisplan for achieving financial stability is likely violative of criminal andcivil laws, facing and resolving that difficulty is at the heart of theprofession of lawyering. It is not much of a defense for a lawyer to claimignorance of the law as an excuse.
What, after all, was the evidence against Lehr
upon which the judge determined no rational jury could have based aconviction? Without being present or having access to a full transcript, thereis no definitive way to approach that question. Certainly the judge'sruling may have been the only possible ruling any reasonable judge could havemade. Yet the evidence reported in the press and recited in the indictments,and noted but dismissed by the judge, suggests to anyone familiar with healthcare practices in the last 10 years that Lehr
may well have hadthe LaHues pegged as criminals, but chose to go forward with structuring a dealin order to accommodate a valuable client. The prosecution presented evidencethat Lehr
, in a 1991 telephone conversation with Thompson
, referred to theLaHue brothers as motivated to "sell old folk referrals," that shehad previously prevented her client Baptist Medical Center from buying theLaHues' Blue Valley Medical Group because "they were scum"and that she did not know what they did for their money.
Other evidence is recited and dismissed by the judge asnot being sufficient to prove guilt. Yet an experienced health care lawyerwould be hard pressed to conclude that Lehr
could have beenignorant of the kickback and referral scheme between Baptist and the LaHues, ascheme that the same jury which was not allowed to consider the charges againstthe lawyers concluded did exist, beyond a reasonable doubt. The jury must haveconcluded that both the "scum" doctors and Lehr
's blue chip clients, the Baptist Medical Center'spresident and chief operating officer, knowingly and willfully engaged in a"payment for patient" scheme and a conspiracy with the LaHues tocover up the plan. Given the length of the relationship between the lawyers andtheir clients, the knowledge and experience of the lawyers in the health carearena, and the obvious illegality of the scheme as early as 1991, fewprosecutors would assume that these lawyers must have been innocent pawns dupedby their clients into drafting the very documents that made the criminalenterprise possible.
There is no question that government lawyers are examiningthe role of health care lawyers in creating and maintaining criminal healthcare enterprises. The criminal defense bar is well aware of the efforts of someprosecutors to find criminality in what may be constitutionally protectedconduct, and quite properly, the bar and bench of this jurisdiction haveresisted overzealous prosecutorial actions which could chill that relationship.The right of a criminal defendant to legal counsel, however, is sui generis.Health care lawyers who are involved in business transactions, when not actingas criminal defense lawyers, or otherwise protected by litigation-derived privileges,would do well to consider that they are no different by virtue of theirprofessional ticket than other players in the deals they help to structure.Failure to give clients the hard advice, that certain lucrative businessventures can result in criminal indictments and convictions, may result inconsequences even more severe than the loss of a valuable client.
Readers interested in the details of this prosecutionshould consult the excellent articles by John T. Dauner and other staffreporters of the Kansas City, Missouri Star, which were invaluable to thisauthor. These articles can be found at www.newslibrary.com. (Editor'snote: There are charges for viewing articles on this Web site.)