Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Civil Remedies Division
In the Cases of:
The Inspector General,
- v. -
Hanlester Network, et al.
(Nos. C-186 through C-192);
and
Melvin L. Huntsinger, M.D.
(No. C-208)
and
Ned Welsh (No. C-213),
Respondents.
DATE: March 1, 1991
Docket Nos. C-186
through C-192,
No. C-208 and C-213
DECISION
Respondents requested hearings to contest the Inspector General's
(the I.G.) proposal to exclude them from participating in Medicare
and any State health care program. 1/ The I.G. alleged that
Respondents violated sections 1128B(b)(1) and (b)(2) of the Social
Security Act (the Act), and that exclusions were therefore
authorized by section 1128(b)(7) of the Act. The I.G. requested
that I impose and direct exclusions against Respondents for
periods ranging from three years to permanent.
I decided to consolidate these cases because there were issues of
fact and law which were common to all of them. I held a
consolidated hearing in Van Nuys, California from August 14 to 27,
1990. Based on the law, regulations, and evidence adduced at the
hearing of these cases, I conclude that the I.G. proved that
Respondents The Hanlester Network, Pacific Physicians Clinical
Laboratory, Ltd., Omni Physicians Clinical Laboratory, Ltd., and
Placer Physicians Clinical Laboratory, Ltd. knowingly and
willfully offered remuneration to physicians to induce them to
refer program-related business in violation of section 1128B(b)(2)
of the Act. I conclude that the I.G. did not prove that
Respondents Kevin Lewand, Gene Tasha, Ned Welsh, Melvin L.
Huntsinger, M.D., or Keorle Corp. knowingly and willfully offered
or paid remuneration to physicians to induce them to refer
program-related business in violation of section 1128B(b)(2) of
the Act. I conclude that the I.G. did not prove that any of
Respondents knowingly and willfully solicited or received
remuneration in return for referring program-related business in
violation of section 1128B(b)(1) of the Act. I conclude that no
remedial purpose would be served by imposing or directing
exclusions in this case. Therefore, I neither impose nor direct
an exclusion against any Respondent.
As a convenience, a table of contents is set forth below.
TABLE OF CONTENTS Page
Issues 5
Findings of Fact and Conclusions of Law 5
Analysis 31
I. The parties contentions 31
A. The I.G.'s contentions 31
1. The I.G.'s contentions concerning the 32
relationship between Respondents and limited
partners in the three joint venture laboratories
2. The I.G.'s contentions concerning the 34
relationship between the laboratories and SKBL
B. Respondent's contentions 35
1. Respondents' contentions concerning 35
their relationship with individual investors in the
three joint venture laboratories
2. Respondents' contentions concerning 36
the relationship between the laboratories and SKBL
II. Analysis of the evidence 37
A. Respondents' relationships to each other 38
B. Respondents' plans for establishing 39
Respondents PPCL, Omni, and Placer and for marketing
limited partnership shares
C. Ms. Hitchcock's marketing activities 44
D. Respondent's relationships with limited 47 partners
E. The relationship between Respondents 55
Hanlester, PPCL, Omni, Placer, and SKBL
III. The meaning of section 1128B(b)(2) of the 61
Act
A. The evolution and history of section 62
1128B(b)
B. Statutory language and construction 65
C. Judicial application of the Act 69
D. The I.G.'s reliance on the term "to 71
induce"
E. The Secretary's authority to adopt "safe 75 harbor"
regulations
F. The implications of the I.G.'s 75
interpretation
IV. What must be proven to establish a violation 80
under sections 1128B(b)(1) and 1128B(b)(2)
A. Intent 80
B. Agreement to refer program-related 81
business
V. Analysis of Respondents' conduct in the 81
context of section 1128B(b)
A. Analysis of Respondents' conduct pursuant 81
to section 1128B(b)(1)
B. Analysis of Respondents' conduct pursuant 82
to section 1128B(b)(2)
1. Liability of Respondents Hanlester, 84
PPCL, Omni, and Placer for the acts of their agent
Ms. Hitchcock
2. Liability of Respondents Lewand, 85
Tasha, Welsh Huntsinger, and Keorle for the acts of
Ms. Hitchcock
3. Liability of Respondents Lewand, 88
Tasha, Welsh, Huntsinger, and Keorle for their
statements and acts
a. Respondent Lewand 90
b. Respondent Tasha 90
c. Respondent Welsh 90
d. Respondent Keorle 91
e. Respondent Huntsinger 91
VI. Remedy 92
Conclusion 97
ISSUES
The issues in these cases are whether:
1. any Respondent knowingly and willfully solicited or
received remuneration in return for referring program-related
business in violation of section 1128B(b)(1) of the Act;
2. any Respondent knowingly and willfully offered or paid
remuneration in order to induce physicians to refer program-
related business in violation of section 1128B(b)(2) of the Act;
3. a remedial purpose would be served by imposing or
directing an exclusion against any Respondent from participating
in the Medicare and Medicaid programs.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
1. The Respondents in these cases are: The Hanlester Network
(Respondent Hanlester); Keorle Corp. (Respondent Keorle); Pacific
Physicians Clinical Laboratory, Ltd. (Respondent PPCL); Omni
Physicians Clinical Laboratory, Ltd. (Respondent Omni); Placer
Physicians Clinical Laboratory, Ltd. (Respondent Placer); Kevin
Lewand (Respondent Lewand); Gene Tasha (Respondent Tasha); Melvin
L. Huntsinger, M.D. (Respondent Huntsinger); and Ned Welsh
(Respondent Welsh).
2. Respondent Keorle is a California corporation whose
shareholders include Respondent Lewand. Tr. at 1940. 2/
3. Prior to January, 1989, Respondent Keorle was known as the
Hanlester Corporation. Tr. at 1975-76.
4. Respondent Hanlester is a general partnership organized under
California law. I.G. Ex. 4.0/22.
5. Respondent Hanlester was formed on January 1, 1987. Tr. at
1975.
6. The original general partners in Respondent Hanlester were the
Hanlester Corporation, James A Padova, M.D., Inc., a California
medical corporation, Respondent Tasha, and Respondent Welsh. I.G.
Ex. 4.0/22.
7. Hanlester Corporation owned a majority interest in Respondent
Hanlester. See I.G. Ex. 115.0; Tr. at 2169; see Tr. at 1941.
8. Hanlester Corporation sold its interest in Respondent
Hanlester to Respondent Tasha in January, 1989. See Tr. at 1976.
9. Until January, 1989, Respondent Lewand served as President of
Respondent Hanlester. I.G. Ex. 2.0/7; see Tr. at 1940 - 1948,
1976.
10. Respondent Tasha served as Vice-President, Operations, of
Respondent Hanlester. I.G. Ex. 2.0/7.
11. Respondent Welsh served as Vice-President, Business
Development, of Respondent Hanlester. I.G. Ex. 2.0/7.
12. Respondent Welsh ceased being a general partner or executive
in Respondent Hanlester in the summer of 1987. See I.G. Ex.
17.1/17; see Tr. at 2002.
13. Respondent Hanlester represented that Respondent Huntsinger
served as its medical director. I.G. Ex. 3.0.
14. On March 26, 1987, Respondent Hanlester issued a private
placement memorandum for Respondent PPCL. I.G. Ex. 4.0.
15. The purpose of the private placement memorandum was to offer
limited partnership shares in Respondent PPCL. I.G. Ex. 4.0/1, 7.
16. Respondent PPCL was a limited partnership organized under the
laws of California. I.G. Ex. 4.0/7.
17. A purpose for which Respondent PPCL was organized was to own
a clinical laboratory located in the Los Angeles - Orange County,
California, area. I.G. Ex. 4.0/7.
18. The general partner in Respondent PPCL was Respondent
Hanlester. I.G. Ex. 4.0/22.
19. Respondent Hanlester had exclusive authority to make all
management decisions with respect to Respondent PPCL. I.G. Ex.
4.0/29.
20. Respondent Huntsinger was an initial limited partner in
Respondent PPCL, and owned 30 limited partnership shares. I.G.
Ex. 4/40; Tr. at 2290.
21. On January 31, 1988, Respondent Hanlester issued a private
placement memorandum for Respondent Omni. I.G. Ex. 5.0.
22. The purpose of the private placement memorandum was to offer
limited partnership shares in Respondent Omni. I.G. Ex. 5.0/1, 7.
23. Respondent Omni was a limited partnership organized under the
laws of California. I.G. Ex. 5.0/7.
24. A purpose for which Respondent Omni was organized was to own
a clinical laboratory in or near Pasadena, California. I.G. Ex.
5.0/8.
25. The general partner in Respondent Omni was Respondent
Hanlester. I.G. Ex. 5.0/23.
26. Respondent Hanlester had exclusive authority to make all
management decisions for Respondent Omni. I.G. Ex. 5.0/31.
27. On March 1, 1988, Respondent Hanlester issued a private
placement memorandum for Respondent Placer. I.G. Ex. 6.0.
28. The purpose of the private placement memorandum was to offer
limited partnership shares in Respondent Placer. I.G. Ex. 6.0/1,
7.
29. Respondent Placer was a limited partnership organized under
the laws of California. I.G. Ex. 6.0/7.
30. A purpose for which Respondent Placer was organized was to
own a clinical laboratory in either Roseville or Sacramento,
California. I.G. Ex. 6.0/8.
31. The general partner in Respondent Placer was Respondent
Hanlester. I.G. Ex. 6.0/23.
32. Respondent Hanlester had exclusive authority to make all
management decisions for Respondent Placer. I.G. Ex. 6.0/32.
33. Respondent Hanlester offered investors limited partnership
shares in Respondents PPCL, Omni, and Placer. I.G. Ex. 4.0/1, 7,
9, 10; I.G. Ex. 5.0/1, 7, 9, 10; I.G. Ex. 6.0/1, 7, 9, 10.
34. Respondent Hanlester offered a total of 600 limited
partnership shares in Respondent PPCL, with the offering price
being $500 per share. I.G. Ex. 4.0/1.
35. Respondent Hanlester offered a total of 800 limited
partnership shares in Respondent Omni, with the offering price
being $500 per share. I.G. Ex. 5.0/1.
36. Respondent Hanlester offered a total of 800 limited
partnership shares in Respondent Placer, with the offering price
being $500 per share. I.G. Ex. 6.0/1.
37. The minimum investment offered by Respondent Hanlester to a
potential purchaser of limited partnership shares in either
Respondent PPCL, Respondent Omni, or Respondent Placer, was three
shares. I.G. Ex. 4.0/1; I.G. Ex. 5.0/1; I.G. Ex. 6.0/1.
38. Respondent Hanlester limited the number of purchasers in each
limited partnership (Respondents PPCL, Omni, and Placer) to a
maximum of 35 individuals or entities. I.G. Ex. 4.0/7; I.G. Ex.
5.0/7; I.G. Ex. 6.0/7.
39. Respondent Hanlester restricted its limited partnership
offering in Respondent PPCL to licensed physicians residing in
California who actively practiced medicine in Los Angeles or
Orange County, and to California medical corporations and
partnerships consisting of physicians or entities whose ownership
of shares would, in Respondent Hanlester's judgment, benefit
Respondent PPCL. I.G. Ex. 4.0/7.
40. Respondent Hanlester restricted its limited partnership
offering in Respondent Omni to licensed physicians residing in
California who actively practiced medicine in the north and
eastern portions of Los Angeles County and to California medical
corporations and partnerships consisting of physicians or entities
whose ownership of shares would, in Respondent Hanlester's
judgment, benefit Respondent Omni. I.G. Ex. 5.0/7.
41. Respondent Hanlester restricted its limited partnership
offering in Respondent Placer to licensed physicians residing in
California who actively practiced medicine in the Sacramento
metropolitan area and to California medical corporations and
partnerships consisting of physicians or entities whose ownership
of shares would, in Respondent Hanlester's judgment, benefit
Respondent Placer. I.G. Ex. 6.0/7.
42. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that, initially, substantially
all business would be obtained from the limited partners and that
partnership business would be obtained primarily from the limited
partners. I.G. Ex. 4.0/8, 16, 18; I.G. Ex. 5.0/8 - 9, 16 - 17,
19; I.G. Ex. 6.0/8 - 9, 17, 19.
43. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that physicians who regularly
ordered outpatient tests would be sought as limited partners.
I.G. Ex. 4.0/8; I.G. Ex. 5.0/8 - 9; I.G. Ex. 6.0/8 - 9.
44. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that if they purchased
partnership shares but did not utilize the partnerships'
laboratories, it would be a "blueprint for failure" of the
laboratories. I.G. Ex. 2.0/6; I.G. Ex. 3.0.
45. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that business would also be
solicited from non-partner physicians. I.G. Ex. 4.0/8; I.G. Ex.
5.0/8 - 9; I.G. Ex. 6.0/8 - 9.
46. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that patronage of the
partnerships' laboratories by limited partners was voluntary.
I.G. Ex. 4.0/18; I.G. Ex. 5.0/19; I.G. Ex. 6.0/19.
47. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that, under California law, it
would be illegal to offer or pay consideration to a physician to
induce or compensate that physician to refer patients to a
laboratory. I.G. Ex. 4.0/4; I.G. Ex. 5.0/4; I.G. Ex. 6.0/4.
48. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that returns on investment in
the limited partnerships would not be based on partners' patient
referrals, but would be based on the profits earned by the
partnerships. I.G. Ex. 4.0/4; I.G. Ex. 5.0/5; I.G. Ex. 6.0/5.
49. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that the partnerships' success
in obtaining referrals from limited partners would depend on the
partnerships' laboratories performing outpatient testing and
laboratory analysis in a timely and dependable manner at
competitive rates. I.G. Ex. 4.0/28; I.G. Ex. 5.0/30; I.G. Ex.
6.0/31.
50. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that failure by the
partnerships' laboratories to perform outpatient testing and
laboratory analysis in a timely and dependable manner at
competitive rates could result in the limited partners, who had a
primary duty to their patients, referring their laboratory testing
to laboratories other than the partnerships' laboratories. I.G.
Ex. 4.0/28 - 29; I.G. Ex. 5.0/30; I.G. Ex. 6.0/31.
51. Respondent Hanlester told prospective limited partners in
Respondent PPCL that their annual income per share could range
from $266 to $532, depending on factors including the number of
shares sold, annual receipts, and operating costs. I.G. Ex.
4.0/37.
52. Respondent Hanlester told prospective limited partners in
Respondents Omni and Placer that their annual income per share
could range from about $200 to about $400, depending on factors
including the number of shares sold, annual receipts, and
operating costs. I.G. Ex. 5.0/39 - 40; I.G. Ex. 6.0/40 - 41.
53. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni and Placer that, based on estimates
contained in the private placement memorandums, they could expect
an annual profit of greater than 50% of their investment. I.G.
Ex. 2.0/5; see I.G. Ex. 4.0/37; I.G. Ex. 5.0/39 - 40; I.G. Ex.
6.0/40 -41.
54. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that there could be no
assurance that the partnerships would operate on a profitable
basis or attain projected income levels. I.G. Ex. 4.0/19; I.G.
Ex. 5.0/20; I.G. Ex. 6.0/20.
55. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that projected profits were not
based on historical data, but were based on assumptions regarding
business volume and estimated costs. I.G. Ex. 4.0/27; I.G. Ex.
5.0/29; I.G. Ex. 6.0/30.
56. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that purchase of shares
involved a high degree of risk. I.G. Ex. 4.0/2; I.G. Ex. 5.0/2;
I.G. Ex. 6.0/2.
57. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that they should consider
purchasing shares only if they could afford a total loss of their
investment. I.G. Ex. 4.0/2; I.G. Ex. 5.0/2; I.G. Ex. 6.0/2.
58. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that there were investment
risks associated with the manner in which the partnerships' income
and expenses were considered for tax purposes by the Internal
Revenue Service. I.G. Ex. 4.0/26 - 27; I.G. Ex. 5.0/27 - 29; I.G.
Ex. 6.0/28 - 30.
59. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that there were investment
risks associated with the operation of the partnerships'
laboratories, including the absence of operating histories and
competition from other laboratories. I.G. Ex. 4.0/27 - 29; I.G.
Ex. 5.0/29 - 31; I.G. Ex. 6.0/30 - 32.
60. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that there were investment
risks associated with reliance on the management decisions of
Respondent Hanlester. I.G. Ex. 4.0/29 - 30; I.G. Ex. 5.0/31; I.G.
Ex. 6.0/32.
61. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that it had negotiated a
subcontract with SmithKline Bio-Science Laboratories, Inc. (SKBL)
which gave SKBL the option to manage the partnerships'
laboratories. I.G. Ex. 4.0/16 - 17; I.G. Ex. 5.0/17 - 18; I.G.
Ex. 6.0/17 - 18.
62. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that management of the
partnerships' laboratories by SKBL would assure that all medical
tests would be performed according to the highest standards
attainable. I.G. Ex. 4.0/17; I.G. Ex. 5.0/18; I.G. Ex. 6.0/18.
63. Respondent Hanlester told prospective limited partners in
Respondents PPCL, Omni, and Placer that the private placement
memoranda issued for the limited partnerships were the only sales
material which could be used in connection with the sale of
shares. I.G. Ex. 4.0/10; I.G. Ex. 5.0/10; I.G. Ex. 6.0/10.
64. Richard Aprahamian served as attorney for Respondents Lewand
and Hanlester. Tr. at 2176 - 2177.
65. Mr. Aprahamian prepared the private placement memoranda which
Respondent Hanlester issued for Respondents PPCL, Omni, and
Placer. Tr. at 2177 - 2188; see I.G. Ex. 4.0, I.G. Ex. 5.0; I.G.
Ex. 6.0.
66. Mr. Aprahamian met with Respondents Tasha and Welsh to
discuss the terms of the private placement memoranda and to advise
them as to what they could say to prospective limited partners in
Respondents PPCL, Omni, and Placer. Tr. at 2178 - 2179; see I.G.
Ex. 4.0; I.G. Ex. 5.0; I.G. Ex. 6.0.
67. Mr. Aprahamian also met with Patricia Hitchcock to discuss
the terms of the private placement memoranda and to advise her as
to what she could say to prospective limited partners in
Respondents PPCL, Omni, and Placer. Tr. at 2178; see I.G. Ex.
4.0; I.G. Ex. 5.0; I.G. Ex. 6.0.
68. Ms. Hitchcock was Respondent Hanlester's Vice President of
Marketing and owned four limited partnership shares of Respondent
PPCL. I.G. Ex. 3.0/1; Tr. at 941, 943 - 944.
69. Ms. Hitchcock's duties included selling partnership shares in
Respondents PPCL, Omni, and Placer. Tr. at 942, 946.
70. Ms. Hitchcock was compensated by Respondent Hanlester for her
sales efforts. Tr. at 942.
71. Respondent Hanlester's compensation to Ms. Hitchcock
consisted of $3,000.00 a month, expenses for use of an automobile,
seven percent of the price of partnership shares she sold, and one
percent of the dollar volume of tests referred by physicians to
joint venture laboratories. Tr. at 942 - 943.
72. Ms. Hitchcock's compensation from Respondent Hanlester in
part depended on the dollar amount of business referred to joint
venture laboratories by physicians. Tr. at 943; Finding 71.
73. Mr. Aprahamian met with Respondent Tasha, Respondent Welsh,
and Ms. Hitchcock individually and as a group. Tr. at 2179.
74. Meetings between Mr. Aprahamian, Respondent Tasha, Respondent
Welsh, and Ms. Hitchcock first occurred early in 1987 in
connection with the marketing of limited partnership shares in
Respondent PPCL. Tr. at 2179, 2180; see I.G. Ex. 4.0.
75. Mr. Aprahamian also spoke with Ms. Hitchcock on several
occasions to respond to her questions concerning what advice and
information she could give to prospective limited partners in
Respondents PPCL, Omni, and Placer. Tr. at 2179 - 2184.
76. Mr. Aprahamian told Respondent Tasha, Respondent Welsh, and
Ms. Hitchcock that they should not make any representations to
potential limited partners beyond what was contained in the
private placement memoranda. Tr. at 2180 - 2181.
77. Respondent Lewand told Ms. Hitchcock that the only
information she could provide potential limited partners in
Respondents PPCL, Omni, and Placer was that which was contained in
the private placement memoranda. Tr. at 954, 2024E.
78. Respondents Tasha and Welsh told Ms. Hitchcock that, in
connection with sales presentations she made to potential limited
partners, she should provide potential limited partners with
information contained in the private placement memoranda. Tr. at
982 - 983.
79. Mr. Aprahamian told Respondent Tasha, Respondent Welsh, and
Ms. Hitchcock, in the presence of Respondent Lewand, that the
number of shares offered to a prospective limited partner could
not be based on the volume of business that the prospective
limited partner was going to refer to a joint venture laboratory.
Tr. at 2183 - 2185.
80. Respondents Hanlester, Lewand, Tasha, and Welsh intended that
limited partners in Respondent PPCL, Respondent Omni, or
Respondent Placer would be physicians who would refer business to
a joint venture laboratory. Tr. at 956; Findings 42, 43.
81. Respondents Hanlester, Lewand, Tasha, and Welsh encouraged
prospective limited partners in Respondent PPCL, Respondent Omni,
or Respondent Placer to refer business to a joint venture
laboratory by advising prospective partners that the laboratory's
success would depend on such referrals. Findings 42 -44.
82. Respondents Hanlester, Lewand, Tasha, and Welsh did not
intend to condition ownership of limited partnership shares in
Respondent PPCL, Respondent Omni, or Respondent Placer on the
agreement of prospective partners to refer business to a joint
venture laboratory. See Findings 46, 47, 66, 67, 73 - 79.
83. Respondents Hanlester, Lewand, Tasha, and Welsh did not
intend to condition the number of shares that a prospective
partner could own in Respondent PPCL, Respondent Omni, or
Respondent Placer on the volume of business that the prospective
partner agreed to refer to a joint venture laboratory. See
Findings 46, 47, 66, 67, 73 - 79.
84. Respondents Hanlester, Lewand, Tasha, and Welsh did not
intend to represent to prospective limited partners in Respondent
PPCL, Respondent Omni, or Respondent Placer that there would be
little risk associated with their investment in a joint venture.
See Findings 56 - 60, 66, 67, 73 - 79.
85. The I.G. did not prove that Respondent Huntsinger was
involved in management decisions for Respondent Hanlester as to
what offers or representations would be made to prospective
limited partners in Respondents PPCL, Omni, and Placer. See
Findings 6 - 7.
86. Respondent Welsh made sales presentations on Respondent
Hanlester's behalf for the sale of shares in Respondent PPCL. Tr.
at 950.
87. The I.G. did not prove that Respondent Welsh told prospective
limited partners in Respondent PPCL that the sale of shares would
be conditioned on the prospective partner's agreement to refer
business to a joint venture laboratory. See Tr. at 1485 - 1486;
see Findings 66, 73, 76, 79.
88. The I.G. did not prove that Respondent Welsh told prospective
limited partners in Respondent PPCL that the number of shares
which they could buy would be based on the volume of business that
they would refer to a joint venture laboratory. See Tr. at 1485 -
1486; see Findings 66, 73, 76, 79.
89. The I.G. did not prove that Respondent Welsh told prospective
limited partners in Respondent PPCL that there would be little
risk associated with their ownership of shares or that returns on
their shares would be virtually guaranteed. See Tr. at 1485 -
1486; see Findings 66, 73, 76, 79.
90. Ms. Hitchcock served as Respondent Hanlester's Vice President
of Marketing until November, 1988. I.G. Ex. 3.0; Tr. at 942.
91. Ms. Hitchcock made sales presentations on behalf of
Respondents Hanlester, PPCL, Omni, and Placer for the sale of
shares in Respondents PPCL, Omni, and Placer. Tr. at 941, 942,
946.
92. In her sales presentations, Ms. Hitchcock represented herself
to be Respondent Hanlester's Vice President of Marketing and
offered to sell limited partnership shares on behalf of
Respondents Hanlester, PPCl, Omni, and Placer. I.G. Ex. 3.0, I.G.
Ex. 110.0/2 - 3; Tr. at 952.
93. Ms. Hitchcock was authorized by Respondent Hanlester to sell
between three and ten shares in Respondent PPCL, Respondent Omni,
or Respondent Placer to a prospective limited partner, subject to
Respondent Lewand's final approval. Tr. at 989.
94. In her sales presentations to prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer, Ms.
Hitchcock told some of them that they could anticipate an annual
return of 300 - 400 percent on the purchase price of shares. Tr.
at 985 - 986.
95. In her sales presentations to prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer, Ms.
Hitchcock told some of them that the return on their investment
would be virtually guaranteed. Tr. at 986.
96. In her sales presentations to prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer, Ms.
Hitchcock told some of them that an "off the record" condition of
sale was that the number of shares sold to a prospective limited
partner would be based on the anticipated volume of business that
that partner would refer to a joint venture laboratory. Tr. at
995 - 996.
97. The I.G. did not prove that, in her sales presentations to
prospective limited partners in Respondent PPCL, Respondent Omni,
or Respondent Placer, Ms. Hitchcock told some of them that a
prospective limited partner must agree to refer business to a
joint venture laboratory as a condition for purchasing limited
partner shares. See I.G. Ex. 78.0, 81.0, 109.0/9 - 11, 110.0/6;
Tr. at 773, 1451, 1472, 1522, 1614.
98. In her sales presentations to prospective partners in
Respondent PPCL, Respondent Omni, or Respondent Placer, Ms.
Hitchcock told some of them that limited partners who did not
refer business to a joint venture laboratory would be pressured by
Respondent Hanlester to either increase their referrals or sell
back their shares to Respondent Hanlester. See I.G. Ex. 109.0/9 -
11, 110/6; Tr. at 1122, 1129.
99. Ms. Hitchcock was not authorized by Respondents Hanlester,
Lewand, Welsh, or Tasha to tell prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer that they
could anticipate an annual return of 300 - 400 percent on the
purchase price of shares. Tr. at 1130; Findings 73 - 79.
100. Ms. Hitchcock was not authorized by Respondents Hanlester,
Lewand, Welsh, or Tasha to tell prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer that the
return on their investment would be virtually guaranteed.
Findings 73 - 79.
101. Ms. Hitchcock was not authorized by Respondents Hanlester,
Lewand, Welsh, or Tasha to tell prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer that the
number of shares that a prospective limited partner could purchase
would depend on the amount of business that the partner would
refer to a joint venture laboratory. Findings 73 - 79.
102. Ms. Hitchcock was not authorized by Respondents Hanlester,
Lewand, Welsh, or Tasha to tell prospective limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer that if
they did not refer business to a joint venture laboratory they
would be pressured by Respondent Hanlester to sell back their
shares. Findings 73 - 79.
103. The I.G. did not prove that Respondents Hanlester, Lewand,
Welsh, or Tasha knew that Ms. Hitchcock told prospective limited
partners in Respondent PPCL, Respondent Omni, or Respondent Placer
that they could anticipate an annual return of 300 - 400 percent
on the purchase price of shares. See Tr. at 1130, 2024I - 2024O
104. The I.G. did not prove that Respondents Hanlester, Lewand,
Welsh, or Tasha knew that Ms. Hitchcock told prospective limited
partners in Respondent PPCL, Respondent Omni, or Respondent Placer
that the return on their investment would be virtually guaranteed.
See Tr. at 2024I - 2024O
105. The I.G. did not prove that Respondents Hanlester, Lewand,
Welsh, or Tasha knew that Ms. Hitchcock told prospective limited
partners in Respondent PPCL, Respondent Omni, or Respondent Placer
that the number of shares that a prospective limited partner could
purchase would depend on the amount of business that that partner
would refer to a joint venture laboratory. See Tr. at 994 - 1002,
2024I - 2024O.
106. The I.G. did not prove that Respondents Hanlester, Lewand,
Welsh, or Tasha knew that Ms. Hitchcock told prospective limited
partners in Respondent PPCL, Respondent Omni, or Respondent Placer
that if they did not refer business to a joint venture laboratory
they would be pressured by Respondent Hanlester to sell back their
shares. See Tr. at 2024I - 2024O.
107. Ms. Hitchcock ceased working for Respondent Hanlester in
November 1988. Tr. at 942.
108. Respondent Tasha made sales presentations on Respondent
Hanlester's behalf for the sale of shares in Respondents PPCL,
Omni, and Placer. Tr. at 2215.
109. Respondent Tasha did not tell prospective limited partners
in Respondent PPCL, Respondent Omni, or Respondent Placer that
they must agree to refer business to a joint venture laboratory as
a condition of purchasing shares. Tr. at 2215.
110. Respondent Tasha did not tell prospective limited partners
in Respondent PPCL, Respondent Omni, or Respondent Placer that the
number of shares that they would be permitted to purchase would
depend on the amount of business they agreed to refer to a joint
venture laboratory. Tr. at 2215 - 2216.
111. On behalf of Respondent Hanlester, Respondent Huntsinger
contacted physicians to determine whether they were interested in
purchasing shares in Respondent PPCL, Respondent Omni, or
Respondent Placer. Tr. at 2296.
112. Respondent Huntsinger did not make sales presentations to
prospective limited partners in Respondent PPCL, Respondent Omni,
or Respondent Placer on behalf of Respondent Hanlester. Tr. at
2297 - 2299.
113. Respondent Huntsinger was not employed by Respondent Lewand,
Respondent Welsh, Respondent Tasha, Respondent Hanlester,
Respondent PPCL, Respondent Omni, or Respondent Placer. See Tr.
at 2294.
114. Respondent Huntsinger had a contract with SKBL to serve as
medical director of Respondent PPCL and Respondent Omni. Tr. at
2294.
115. It was in the pecuniary interest of Respondent Hanlester and
its general partners that limited partners in Respondents PPCL,
Omni, and Placer refer business to joint venture laboratories.
I.G. Ex. 3.0, 4.0, 5.0, 6.0.
116. Respondent Lewand loaned three physicians the amount of the
purchase price of the shares that they purchased in Respondent
PPCL. I.G. Ex. 10.0, 11.0; Tr. at 2024Q - 2024S.
117. The payment provisions of these loans were subsequently
modified to permit the borrowers to pay off the loans by crediting
their limited partnership distributions against the principal
amounts. Tr. at 2104 -2105; see I.G. Ex. 10.1, 11.1.
118. Respondent Lewand made these loans because Ms. Hitchcock had
told the borrowers that they would be loaned the funds to purchase
shares in Respondent PPCL. Tr. at 2024Q - 2024S.
119. Respondent Hanlester monitored limited partners' usage of
joint venture laboratories. I.G. Ex. 109.0/11; Tr. at 546, 911 -
914, 2024N.
120. In the Spring and Summer of 1988, Respondents Tasha and
Lewand attempted to resolve problems that physicians experienced
with the quality of services provided by joint venture
laboratories. Ha. Ex. 40, 41; Tr. at 2216.
121. Respondents PPCL, Omni, and Placer experienced problems with
the quality of service that was being provided to physicians who
referred laboratory tests. Tr. at 2216; Finding 120.
122. Problems included failure to pick up laboratory tests. Tr.
at 2216 - 2217.
123. Problems also included problems with billing and collecting
for laboratory services. Tr. at 2010 - 2011, 2232; Finding 120.
124. Respondent Tasha requested Respondent Huntsinger to
telephone physicians whose referrals to joint venture laboratories
had decreased. Tr. at 2231 - 2232.
125. Respondent Huntsinger made telephone calls to limited
partners in Respondent PPCL and Respondent Omni in his capacity as
medical director. Tr. at 2302.
126. The purpose of these calls was to resolve problems that
limited partners were experiencing concerning their use of joint
venture laboratories. Tr. at 2302.
127. Respondent Huntsinger asked limited partners to explain why
they did not refer more business to joint venture laboratories.
Tr. at 768, 1562 - 1563, 1830.
128. Respondent Huntsinger told limited partners that they were
not referring sufficient business to joint venture laboratories,
based on comparing their referrals to referrals made by other
limited partners. Tr. at 1455, 1489.
129. Respondent Huntsinger told limited partners that their
failure to make sufficient referrals to a joint venture laboratory
was hurting the interests of other limited partners. Tr. at 1489.
130. The I.G. did not prove that Respondent Huntsinger told
limited partners in Respondent PPCL or Respondent Omni that they
must refer business to a joint venture laboratory as a condition
for owning shares. See Findings 124 - 127.
131. The I.G. did not prove that Respondent Huntsinger told
limited partners in Respondent PPCL or Respondent Omni that they
must increase their referrals to a joint venture laboratory as a
condition for owning shares. See Findings 124 - 127.
132. The I.G. did not prove that Respondent Huntsinger threatened
limited partners in Respondent PPCL or Respondent Omni that the
purchase price of their shares would be returned to them and their
limited partnerships would be terminated unless they utilized
joint venture laboratories. See Findings 124 - 127.
133. At a meeting of limited partners in December 1987, a limited
partner asked Respondent Lewand the consequences which could
result from a limited partner not referring business to a joint
venture laboratory. Tr. at 2019.
134. Respondent Lewand answered the question by stating that the
fact that a physician does not refer tests to a joint venture
laboratory is not grounds for his removal as a limited partner.
Tr. at 2020.
135. Respondent Lewand further stated that the basis for
repurchase of a limited partner's shares in Respondent PPCL,
Respondent Omni, or Respondent Placer would be that partner's
death, retirement, closing his practice, or if 51 percent of the
partners agreed that it would be detrimental to the partnership's
interest for the limited partner to remain. Tr. at 2020; see Tr.
at 1644, 1648.
136. The I.G. did not prove that Respondent Lewand told limited
partners in Respondent PPCL, Respondent Omni, or Respondent Placer
that their shares would be repurchased if they failed to refer
business to a joint venture laboratory. See Findings 133 - 135.
137. The I.G. did not prove that Respondent Hanlester, Respondent
Tasha, or Respondent Welsh told limited partners in Respondent
PPCL, Respondent Omni, or Respondent Placer that their shares
would be repurchased if they failed to refer business to a joint
venture laboratory. See We Ex. 37, 38,39, 40; I.G. Ex. 39.0; Tr.
at 429 - 432, 502 - 503, 505, 510, 806, 836 - 837, 2126, 2217;
Findings 109, 110, 125 - 130, 133 - 135.
138. Respondent Hanlester returned the purchase price of shares
to some limited partners in Respondent PPCL after they had
telephone conversations with Respondent Huntsinger concerning the
amount of business they referred to a joint venture laboratory.
I.G. Ex. 13.0; Tr. at 769, 1457, 1563 - 1564, 1831.
139. Some limited partners in Respondent PPCL did not refer
business to a joint venture laboratory, but remained limited
partners in Respondent PPCL. Tr. at 825 - 830, 831, 1442.
140. Some limited partners in Respondent PPCL requested
Respondent Hanlester to return the purchase price of their shares
to them. Tr. at 1563 -1564, 1794 - 1795.
141. The I.G. did not prove that the reason that Respondent
Hanlester returned the purchase price of shares to some limited
partners in Respondent PPCL was their failure to refer sufficient
business to a joint venture laboratory. Tr. at 2020, 2217; see
Tr. at 542 - 545; 1460 - 1461, 1490, 1528 - 1529, 1563 - 1564,
1794 - 1795, 1841; see Findings 133 - 137.
142. The I.G. did not prove that Respondent Lewand, Respondent
Tasha, or Respondent Welsh directed Respondent Hanlester to return
the purchase price of shares to some limited partners in
Respondent PPCL because of the partners' failure to refer
sufficient business to a joint venture laboratory. See Findings
133 - 137.
143. On April 9, 1987, Respondent Hanlester and SKBL entered into
a master laboratory services agreement. I.G. Ex. 1.0.
144. In the master laboratory services agreement, Respondent
Hanlester agreed to offer SKBL the opportunity to provide
management services for joint venture laboratories organized by
Respondent Hanlester. I.G. Ex. 1.0/2.
145. In the master laboratory services agreement, SKBL agreed to
provide laboratory management services to all joint venture
laboratories in which Respondent Hanlester had an ownership
interest. I.G. Ex. 1.0/3.
146. On July 27, 1987, SKBL entered into a laboratory management
agreement with Respondent PPCL. I.G. Ex. 4.1.
147. The laboratory management agreement required Respondent PPCL
to provide facilities and equipment necessary for appropriate
operation of the laboratory. I.G. Ex. 4.1/2.
148. The laboratory management agreement required Respondent PPCL
to provide the services of a licensed medical director. I.G. Ex.
4.1/3.
149. The laboratory management agreement required Respondent PPCL
to repair and maintain laboratory space and to pay utility charges
incurred by the laboratory. I.G. Ex. 4.1/3.
150. The laboratory management agreement required SKBL to provide
and compensate all staff necessary to operate the laboratory.
I.G. Ex. 4.1/3.
151. The laboratory management agreement required SKBL to
supervise the administrative and operational activities of the
laboratory. I.G. Ex. 4.1/3 - 4.
152. The laboratory management agreement required SKBL to provide
all necessary equipment not already provided by Respondent PPCL,
and to maintain and repair all laboratory equipment. I.G. Ex.
4.1/4.
153. The laboratory management agreement required SKBL to conduct
all billing and collection activities for the laboratory. I.G.
Ex. 4.1/5.
154. The laboratory management agreement required Respondent PPCL
to pay SKBL a monthly management fee of $15,000.00 or 80 percent
of all net cash receipts, whichever was greater. I.G. Ex. 4.1/5 -
6.
155. Subsequent to July 27, l987, Respondent Hanlester,
Respondent PPCL and SKBL agreed to reduce PPCL's monthly
management fee to SKBL under the laboratory management agreement
to $15,000.00 or 76 percent of all net cash receipts, whichever
was greater. I.G. Ex. 4.3; Tr. at 410, 2011 - 2012, see Finding
146.
156. On July 27, 1987, Respondent Hanlester and SKBL entered into
a laboratory support services agreement. I.G. Ex. 4.2.
157. Respondent Hanlester and SKBL agreed that Respondent
Hanlester would be responsible for setting up, maintaining, and
servicing the client accounts for Respondent PPCL. I.G. Ex. 4.2/2
- 3.
158. Respondent Hanlester and SKBL agreed that, as compensation
for setting up, maintaining, and servicing the client accounts of
Respondent PPCL, Respondent Hanlester would receive four percent
of Respondent PPCL's net cash receipts. I.G. Ex. 4.2/12.
159. When Respondent Hanlester, Respondent PPCL, and SKBL agreed
to reduce SKBL's management fee from 80 percent of Respondent
PPCL's net cash receipts to 76 percent of Respondent PPCL's net
cash receipts, they simultaneously agreed that Respondent
Hanlester would not be paid the compensation agreed to in the
laboratory support services agreement. I.G. Ex. 4.3/1.
160. In July, 1988, Respondent Hanlester, Respondent Omni, and
SKBL agreed that SKBL would manage laboratory facilities for
Respondent Omni. I.G. Ex. 5.1.
161. The terms and conditions pursuant to which SKBL would manage
Respondent Omni's laboratory, the rights and duties of Respondent
Hanlester, Respondent Omni, and SKBL, and the compensation to be
paid to SKBL were basically the same as was provided in the
agreements between Respondent Hanlester, Respondent PPCL, and
SKBL. These terms and conditions included a monthly management fee
of $15,000.00 or 76 percent of net cash receipts, whichever was
greater. I.G. Ex. 5.1; see Findings 146 - 159.
162. In August, 1988, Respondent Hanlester, Respondent Placer,
and SKBL agreed that SKBL would manage laboratory facilities for
Respondent Placer. I.G. Ex. 6.1.
163. The terms and conditions pursuant to which SKBL would manage
Respondent Placer's laboratory, the rights and duties of
Respondent Hanlester, Respondent Placer, and SKBL, and the
compensation to be paid to SKBL were basically the same as was
provided in the agreements between Respondent Hanlester,
Respondent PPCL, and SKBL. These terms and conditions included a
monthly management fee of $15,000.00 or 76 percent of net cash
receipts, whichever was greater. I.G. Ex. 6.1; see Findings 146 -
159.
164. One effect of the agreements between Respondent Hanlester,
Respondent PPCL, Respondent Omni, Respondent Placer, and SKBL, was
to shift the operating risks of running the joint venture
laboratories from Respondent Hanlester, Respondent PPCL,
Respondent Omni, and Respondent Placer to SKBL. Findings 146 -
163.
165. The compensation that Respondents PPCL, Omni, and Placer
paid to SKBL in return for SKBL's assumption of the operating
risks of the joint venture laboratories was 76 percent of the
joint venture laboratories' revenues, if greater than $15000.00.
Findings 155, 161, 163.
166. The risk assumed by SKBL in this relationship was that its
costs of managing the joint venture laboratories might exceed 76
percent of the laboratories' revenues. Findings 164, 165.
167. A risk assumed by Respondent Hanlester, Respondent PPCL,
Respondent Omni, and Respondent Placer in this relationship was
that SKBL would fail to efficiently manage the joint venture
laboratories, thereby causing physicians to cease referring
business to the laboratories. Tr. at 206 - 207, 210 - 212.
168. SKBL deposited the receipts earned by Respondent PPCL,
Respondent Omni, and Respondent Placer in an account which was
maintained for each of the aforesaid Respondents. Tr. at 625,
670, 673.
169. The accounts were maintained by SKBL pursuant to the
agreements between Respondents Hanlester, PPCL, Omni, Placer, and
SKBL. Tr. at 673; Findings 153, 160, 162.
170. Payments were made from these accounts to: make refunds to
patients for overpayments or to correct billing errors; compensate
Respondent Hanlester pursuant to the laboratory support services
agreements; compensate SKBL for its management services; and
compensate Respondent PPCL, Respondent Omni, and Respondent
Placer. I.G. Ex. 40.0; Tr. at 625.
171. In October 1987, SKBL decided to make payments to Respondent
PPCL based on expected collections from laboratory tests. I.G.
Ex. 40.0, 41.0; Tr. at 626 - 629.
172. Expected collections exceeded that which actually had been
collected. I.G. Ex. 40.0, 41.0; Tr. at 629.
173. SKBL treated the difference between what was paid based on
expected collections and what actually had been collected as an
advance to Respondent PPCL, to be deducted from future payments
out of the account which SKBL managed on Respondent PPCL's behalf.
I.G. Ex. 40.0, 41.0.
174. SKBL's purpose for advancing money to Respondent PPCL in
1987 was to provide greater initial compensation for Respondent
PPCL's limited partners. Tr. at 628.
175. SKBL continued to make payments to Respondent PPCL based on
expected collections until January 1990, when SKBL terminated its
management agreement with Respondent PPCL. Tr. at 634.
176. SKBL made payments to Respondent Omni and to Respondent
Placer based on expected collections. Tr. at 634 - 635.
177. SKBL's decision to make payments to Respondents PPCL, Omni,
and Placer based on expected collections meant that these
Respondents received distributions of revenue earlier than they
otherwise would have. Tr. at 731, 732.
178. SKBL's decision to make payments to Respondents PPCL, Omni,
and Placer based on expected collections did not mean that these
Respondents received greater total distributions of revenue than
they were entitled to receive under their management agreements
with SKBL. See Findings 171 - 177.
179. SKBL's decision to make payments to Respondents PPCL, Omni,
and Placer based on expected collections enabled these Respondents
to make distributions of revenue to their limited partners in the
amounts distributed earlier than otherwise would have been
possible. See Finding 177.
180. SKBL's decision to make payments to Respondents PPCL, Omni,
nd Placer based on expected collections did not mean that these
Respondents were able to make greater total distributions of
revenue to their limited partners than otherwise would have been
possible. See Finding 178.
181. SKBL elected to perform many of the laboratory tests sent to
Respondent PPCL, Respondent Omni, or Respondent Placer at SKBL
facilities. I.G. Ex. 38.0, 42.0, 43.0; Tr. at 636 - 640.
182. SKBL processed at its central processing laboratory in Van
Nuys, California all of the tests sent to Respondent PPCL or to
Respondent Omni and not performed by these Respondents'
laboratories. Tr. at 344 - 345; 575 - 576.
183. SKBL processed at its central processing laboratory in
Dublin, California, many of the tests sent to Respondent Placer
and not performed by this Respondent's laboratory. Tr. at 575 -
576.
184. One reason that SKBL elected to process tests from
Respondents PPCL, Omni, and Placer at its central processing
facilities was that it was more efficient for SKBL to process
tests centrally than at these Respondents' laboratories. Tr. at
434.
185. It is not uncommon for small clinical laboratories to refer
laboratory tests to larger laboratories in order to benefit from
the more efficient processing which may be provided by larger
laboratories. Tr. at 191, 384 - 385; see Tr. at 1384.
186. It was to SKBL's advantage under its management agreements
with Respondents PPCL, Omni, and Placer to process laboratory
tests as efficiently and economically as possible. Findings 165,
166.
187. Respondents PPCL, Omni, and Placer did not maintain
sufficient equipment at their laboratories to conduct all tests
sent to them at these laboratories. Tr. at 434.
188. Respondents PPCL, Omni, and Placer maintained sufficient
equipment at their laboratories to perform "stat tests" -- meaning
tests ordered by physicians that required immediate results. Tr.
at 435 - 436.
189. Such stat tests included pregnancy tests and tests to
monitor blood levels of medications. Tr. at 435 - 436.
190. The percentage of tests that physicians sent to Respondents
PPCL, Omni, or Placer which were performed at these Respondents'
laboratories ranged from about 10 to about 15 percent. Tr. at
438.
191. Most of the laboratory tests sent to Respondents PPCL, Omni,
and Placer were sent by physicians who were limited partners in
these Respondents. I.G. Ex. 92.2, 93.1, 94.1.
192. Most of the laboratory tests sent to Respondents PPCL, Omni,
and Placer by physicians who were not limited partners in these
Respondents were sent by physicians whose practices were located
within a short distance from the laboratories operated by
Respondents PPCL, Omni, and Placer. Tr. at 897, 933 - 934.
193. Most of the revenues earned by Respondents PPCL, Omni, and
Placer were earned from tests sent to these Respondents by limited
partners. See Finding 191.
194. Respondents PPCL, Omni, and Placer could not have been
profitable unless limited partners sent a substantial number of
laboratory tests to them. See Findings 191, 193.
195. Respondents PPCL, Omni, and Placer made distributions to
each of their limited partners based on net profits and the amount
of limited partnership shares owned by each partner. Tr. at 1234,
2100; Finding 48.
196. Respondents PPCL, Omni, and Placer did not make
distributions to any of their limited partners based on the amount
of tests sent to a joint venture laboratory by that partner. Tr.
at 227, 1234; Finding 48.
197. Respondent PPCL paid its limited partners returns on their
investments of about 18 percent in 1987, 65 percent in 1988, and
60 percent in 1989. I.G. Ex. 27.0; Tr. at 1208.
198. Respondent Omni paid its limited partners a return on their
investment of about 50 percent in 1989. See I.G. Ex. 22.1, 32.0,
86.0.
199. Respondent Placer paid its limited partners a return on
their investment of more than 50 percent in 1989. See I.G. Ex.
23.1, 32.0, 86.2.
200. The I.G. did not prove that the rates of return which
Respondent PPCL, Respondent Omni, or Respondent Placer paid to
their limited partners greatly exceeded that which is typically
paid by health care limited partnerships to their limited
partners. See Findings 195 - 197.
201. The I.G. did not prove that SKBL's assumption of the risk of
operating laboratories owned by Respondents PPCL, Placer, and Omni
constituted payment of remuneration to these Respondents and
Respondent Hanlester in return for their referring laboratory
tests to SKBL. See Findings 164 - 166.
202. The I.G. did not prove that SKBL's decision to make
distributions to Respondents PPCL, Omni, and Placer based on
expected collections of revenues rather than on actual collections
constituted payment of remuneration to these Respondents and
Respondent Hanlester in return for their referring laboratory
tests to SKBL. See Findings 171 - 180.
203. The I.G. did not prove that the management relationship
between Respondents Hanlester, PPCL, Omni, and Placer, and SKBL
eliminated virtually all risk to limited partners in Respondent
PPCL, Respondent Omni, or Respondent Placer. See Findings 56 -
60, 167.
204. The I.G. did not prove that the management relationship
between Respondents Hanlester, PPCL, Omni, and Placer, and SKBL
was intended by Respondents to disguise remuneration from SKBL to
Respondents Hanlester, PPCL, Omni, and Placer in return for these
Respondents' referring laboratory tests to SKBL. See Findings 143
- 186.
205. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer
solicited or received remuneration from SKBL in return for
referring Medicare or Medicaid business to SKBL. See Findings 143
- 186.
206. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, or Keorle offered physicians the opportunity to
buy limited partnership shares in Respondents PPCL, Omni or Placer
conditioned on these physicians agreeing to send laboratory tests
to joint venture laboratories. See Findings 33 -66, 73 - 89, 99
- 106.
207. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, or Keorle offered physicians the opportunity to
buy limited partnership shares in Respondents PPCL, Omni, or
Placer in amounts determined by or related to the business that
these physicians were willing to send to joint venture
laboratories. See Findings 33 - 66, 73 - 89, 99 - 106.
208. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer
conditioned continuing ownership of limited partnership shares in
Respondents PPCL, Omni, or Placer on limited partners sending
tests to joint venture laboratories. See Findings 119 - 142.
209. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer
disguised payments to limited partners for tests referred to joint
venture laboratories as partnership distributions on investments.
See Findings 193 - 200.
210. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer
offered or paid compensation to physicians in return for their
agreeing to send tests to joint venture laboratories. Findings
206 - 208.
211. The I.G. proved that Ms. Hitchcock, acting as the agent of
Respondents Hanlester, PPCL, Omni, and Placer knowingly and
willfully offered physicians the opportunity to buy limited
partnership shares in Respondents PPCL, Omni, and Placer
conditioned on these physicians agreeing to send laboratory tests
to joint venture laboratories. Findings 67 -72, 90 - 98.
212. The I.G. proved that Ms. Hitchcock, acting as the agent of
Respondents Hanlester, PPCL, Omni, and Placer knowingly and
willfully offered physicians the opportunity to buy limited
partnership shares in Respondents PPCL, Omni, and Placer based on
the volume of business that these physicians were anticipated to
send to joint venture laboratories. Findings 67 - 72, 90 - 98.
213. The I.G. proved that Ms. Hitchcock, acting as the agent of
Respondents Hanlester, PPCL, Omni, and Placer knowingly and
willfully conditioned continuing ownership of limited partnership
shares in Respondents PPCL, Omni, and Placer on limited partners
sending tests to joint venture laboratories. Findings 67 - 72, 90
- 98.
214. The I.G. did not prove that Ms. Hitchcock acted as the agent
of Respondents Lewand, Tasha, Welsh, Huntsinger, or Keorle. See
Findings 67 - 72, 99 - 106.
215. The Secretary of the Department of Health and Human Services
(the Secretary) has the authority to exclude from participation in
Medicare and Medicaid any individual or entity whom he has
determined has committed an act described in Section 1128B of the
Act. Social Security Act, section 1128(b)(7).
216. The Secretary delegated to the I.G. the authority to propose
exclusions pursuant to section 1128(b)(7) of the Act. See 48 Fed.
Reg. 21662, May 13, 1983.
217. Section 1128B(b)(1) of the Act prohibits a party from
knowingly and willfully soliciting or receiving any payment in
return for referring items or services which are compensated for
by Medicare or Medicaid. Social Security Act, section
1128B(b)(1).
218. Section 1128B(b)(2) of the Act prohibits a party from
knowingly and willfully offering or making any payment to obtain
an agreement to refer, or referral of, items or services which are
compensated for by Medicare or Medicaid. Social Security Act,
section 1128B(b)(2).
219. In order to violate section 1128B(b)(2) of the Act, a party
must knowingly and willfully offer to make a payment conditioned
on the offeree agreeing to refer items or services which are
compensated for by Medicare or Medicaid. Social Security Act,
section 1128B(b)(2).
220. Under section 1128B, a principal is liable for the acts of
an agent which are committed on the principal's behalf, even if
the principal did not authorize the agent to commit such acts.
Social Security Act, section 1128B.
221. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, Hanlester, Keorle, PPCL, Omni, or Placer
knowingly and willfully solicited or received remuneration to
refer items or services which are compensated for by Medicare or
Medicaid, in violation of section 1128B(b)(1) of the Act. See
Finding 205.
222. By virtue of the acts of their agent Ms. Hitchcock,
Respondents Hanlester, PPCL, Omni, and Placer knowingly and
willfully offered remuneration to physicians to induce them to
refer items or services which are compensated for by Medicare or
Medicaid, in violation of section 1128B(b)(2) of the Act.
Findings 210 - 212, 219.
223. The I.G. did not prove that Respondents Lewand, Tasha,
Welsh, Huntsinger, or Keorle knowingly and willfully offered or
paid remuneration to physicians to induce them to refer items or
services which are compensated for by Medicare or Medicaid, in
violation of section 1128B(b)(2) of the Act. See Findings 205 -
211.
224. The remedial purpose of an exclusion pursuant to section
1128 of the Act is to protect federally-funded health care
programs and their beneficiaries and recipients from individuals
and entities who have been shown to be untrustworthy. Social
Security Act, section 1128.
225. An ancillary purpose of an exclusion pursuant to section
1128 of the Act is to deter individuals and entities from engaging
in conduct which jeopardizes the integrity of federally-funded
health care programs, or the welfare of beneficiaries and
recipients of these programs. Social Security Act, section 1128.
226. The I.G. did not prove that Respondents Hanlester, PPCL,
Omni, or Placer continue to be an untrustworthy entities, or that
they continue to jeopardize the integrity of federally-funded
health care programs, or the welfare of beneficiaries and
recipients of these programs. See Finding 107.
227. In this case no exclusion is reasonably needed to satisfy
the remedial purpose of section 1128 of the Act. Social Security
Act, section 1128.
ANALYSIS
I. The parties' contentions
A. The I.G.'s contentions
The I.G. argues that Respondents violated the Act in two respects.
First, Respondents, in marketing joint venture limited
partnerships to individual physicians, allegedly offered or paid
remuneration to these physicians in violation of section
1128B(b)(2) of the Act. This section sanctions a party who:
(K)nowingly and willfully offers or pays any remuneration
(including any kickback, bribe, or rebate) directly or
indirectly, overtly or covertly, in cash or in kind to
any person to induce such person --
(A) to refer an individual to a person for the
furnishing of any item or service for which payment may
be made in whole or in part under title XVIII or a State
health care program, or
(B) to purchase, lease, order, or arrange for or
recommend purchasing, leasing, or ordering any good,
facility, service, or item for which payment may be made
in whole or in part under title XVIII or a State health
care program . . . .
Second, Respondents allegedly solicited or received remuneration
from SKBL in violation of section 1128B(b)(1) of the Act. This
section sanctions a party who:
(K)nowingly and willfully solicits or receives any
remuneration (including any kickback, bribe, or rebate)
directly or indirectly, overtly or covertly, in cash or
in kind --
(A) in return for referring an individual to a
person for the furnishing or arranging for the
furnishing of any item or service for which payment may
be made in whole or in part under title XVIII or a State
health care program, or
(B) in return for purchasing, leasing, ordering, or
arranging for or recommending purchasing, leasing, or
ordering any good, facility, service, or item for which
payment may be made in whole or in part under title
XVIII or a State health care program . . . .
1. The I.G.'s contentions concerning the relationship
between Respondents and limited partners in the three joint
venture laboratories
The I.G. contends that the Respondents violated section
1128B(b)(2) of the Act because they offered and paid
"remuneration" to individual physicians to "induce" those
physicians to refer Medicare business to the joint venture
laboratories. The allegedly unlawful inducement consisted of the
opportunity to own shares in the laboratories and to share in the
laboratories' profits where, according to the I.G., the partners
were "virtually guaranteed" a high rate of return on their
investments, so long as they referred laboratory tests to the
joint ventures.
The I.G. asserts that Respondents conditioned limited partners'
purchase of joint venture shares on the partners' agreement to
refer laboratory tests to the joint venture laboratories.
According to the I.G., physicians were permitted to purchase
limited partnership shares based on the number of laboratory tests
they were likely to refer. The I.G. contends that potential
purchasers of limited partnership interests were told that their
participation was conditioned on their agreement to refer tests to
the joint venture laboratories. The I.G. also argues that
physicians who failed to live up to this agreement were ousted
from ownership and their share purchase money was returned to
them.
The I.G. also asserts that Respondents violated the Act even if
they did not condition the offers to sell partnership shares on
the requirement that physicians who purchased shares in the joint
venture laboratories refer tests to those laboratories. He
contends that Respondents violated the Act simply by encouraging
physicians to refer tests to the joint venture laboratories
through offers of low risk equity shares and high rates of return
on investments. He asserts that under the Act the gravamen of the
fraud is the act of inducement. The inducement is illegal,
according to the I.G., even if Respondents did not require as a
quid pro quo to physicians' purchasing shares that they agree to
refer tests to the joint venture laboratories.
The I.G. does not contend that all joint ventures among health
care providers violate the Act. The I.G. contends that the
remuneration scheme of these joint ventures is illegal, because
the remuneration offered and given to the limited partners was not
a legitimate return on an investment. The fraudulent inducement
allegedly lies in the artificially low risks and artificially high
returns which the I.G. contends Respondents offered to physicians
in order to attract their participation and their referrals of
laboratory tests. The investment arrangement in this case
allegedly was an artifice intended to channel payments to
physicians in order to induce them to refer laboratory tests to
the joint venture laboratories.
The I.G. asserts that several features of the joint ventures
establish his contention that the investment arrangement was
merely an artifice. These include: (1) targeting of certain
physicians, either by specialty or by geographic location, as
likely purchasers of investment shares; (2) monitoring referrals
to the joint venture laboratories by individual physician
investors; (3) payment to investors of virtually guaranteed high
rates of return on their investments; and (4) dependence of the
joint venture laboratories on limited partners' test referrals as
a primary source of revenues.
Indeed, according to the I.G., there was no purpose to the
Respondents' raising investment capital from physician investors
other than to disguise the true purpose of the joint ventures,
which was to induce laboratory referrals. The I.G. contends that
there was little or no need for Respondents to raise money from
investors, inasmuch as operating costs were allegedly assumed by
SKBL as an element of its management contracts with the joint
venture laboratories.
2. The I.G.'s contentions concerning the relationship
between the laboratories and SKBL
The I.G. argues that the business relationship between the joint
venture laboratories and SKBL constitutes unlawful solicitation
and receipt of remuneration by Respondents under section
1128B(b)(1). He asserts that the evidence proves that SKBL made
payments to Respondents in order to capture the laboratory tests
referred to the joint venture laboratories by limited partner
physicians.
The I.G. contends that the management agreements between these
laboratories and SKBL were artifices which enabled SKBL to pay
Respondents for referral of laboratory tests from the joint
venture laboratories to SKBL. The management agreements specified
that the laboratories would pay SKBL a percentage of revenues from
laboratory tests, in return for SKBL agreeing to assume management
of the laboratories. The I.G. argues that SKBL did not manage the
laboratories so much as it used them as mere conduits for tests to
be performed by SKBL. The I.G. asserts that the joint venture
laboratories in fact performed few tests. SKBL performed nearly
all of the tests ordered from the laboratories at its own
facilities. There allegedly was little capital invested in the
joint venture laboratories' facilities and equipment and the
laboratories had no employees, aside from Dr. Huntsinger, their
medical director. The laboratories thus were, according to the
I.G., merely conduits for tests and funds, and not viable clinical
laboratories. Therefore, the percentage of the test revenues
retained by the joint venture laboratories was not earnings by the
laboratories on their business operations, according to the I.G.
Rather, it constituted "indirect" remuneration unlawfully
solicited by Respondents and paid by SKBL.
B. Respondents' contentions
Respondents reject both the I.G.'s factual and legal analysis.
They deny that they unlawfully offered or paid remuneration to
individual physicians and they deny that they unlawfully solicited
or received any remuneration from SKBL.
1. Respondents' contentions concerning their
relationship with individual investors in the three joint venture
laboratories
Respondents argue that the I.G. mischaracterizes the facts of the
case in order to conform them to his theory of illegality.
Respondents contend that many of the features of the joint
ventures identified by the I.G. as evidencing unlawful offers of
or payment of remuneration to physician investors neither are
accurately described by the I.G. nor support the I.G.'s
contentions.
Respondents deny that they ever conditioned ownership of limited
partnership interests in the laboratories on purchasers' promises
to refer tests to the laboratories. They deny that partners were
removed for failure to refer business. Respondents assert that
many of the limited partners referred tests in amounts which were
disproportionate to their ownership interests. They contend that
some investors referred no tests and continued as partners,
sharing in the revenues of the joint venture laboratories.
Respondents assert that the fact that physicians who were higher
users of laboratory tests were sought as investors in the joint
ventures is benign. They contend that this marketing strategy
mirrors a common and logical practice in the health care field of
seeking investors in joint ventures who will be likely users of
the ventures' facilities. Respondents contend that their
encouragement of investors to refer tests to the joint venture
laboratories merely reflects the obvious fact that these
laboratories needed referrals in order to survive. They deny that
they offered prospective investors an unusually high rate of
return on their investment or promised prospective investors that
their investment would be virtually risk-free. Respondents aver
that the limited partners incurred risks not atypical for limited
partnership arrangements in the health care industry, as well as
in other markets.
Respondents argue that no illegality results from their
encouraging investors in the laboratories to refer laboratory
tests to these laboratories because they did not require investors
to refer tests as a condition for being permitted to invest in the
laboratories. They assert that the Act proscribes the
solicitation, entry into, and consummation of agreements to pay
remuneration for referrals. Respondents assert that, to interpret
the law as is argued by the I.G., would produce the absurd
consequence of rendering illegal a myriad of benign or
procompetitive business arrangements in the health care market.
Assuming the I.G. elected not to prosecute all of these
arrangements, he could nonetheless exercise virtual carte blanche
authority to pick and choose among them to attack those which he
disliked. Respondents contend that reposing such unlimited
discretion in the I.G. is inimical to Congressional intent.
2. Respondents' contentions concerning the relationship
between the laboratories and SKBL
According to Respondents, the I.G. grossly mischaracterizes the
relationship between the joint venture laboratories and SKBL in
order to buttress his contention that Respondents unlawfully
received remuneration from SKBL. Respondents argue that the
laboratories entered into legitimate management agreements with
SKBL. They contend that Respondents PPCL, Omni, and Placer
compensated SKBL for its management services. No remuneration,
direct or otherwise, was paid to the laboratories by SKBL.
Respondents dispute that the fact that most of the tests ordered
from the joint venture laboratories were shipped to SKBL's
facilities for completion establishes that the joint venture
laboratories were shells or conduits, as is contended by the I.G.
They contend that the pass-through of tests from smaller
laboratories to larger, more sophisticated, laboratories is a
common and benign practice. Furthermore, the decision to perform
tests at SKBL facilities was, according to Respondents, an option
legitimately exercised by SKBL as an aspect of its management
contract with Respondents, and not as a subterfuge.
II. Analysis of the Evidence
I find that Respondents established Respondents PPCL, Omni, and
Placer in order to profit from the laboratory tests which limited
partner physicians ordered. In order to maximize profits,
Respondents actively sought as limited partners those physicians
who would be likely to refer large numbers of tests to joint
venture laboratories. Respondents enticed physicians to become
limited partners by offering them potentially lucrative
investments. They gave limited partners the opportunity to profit
from ordering tests that they could not otherwise profit from.
Respondents encouraged limited partners to refer tests and warned
limited partners of the dire consequences to the joint ventures of
their failure to refer tests.
However, Respondents did not intend to condition ownership of
limited partnership shares on physicians' agreeing to refer tests,
nor did they intend to suggest to physicians that they must refer
tests as a continuing condition of limited partnership. I do not
find that Respondents disciplined limited partners who failed to
refer tests in sufficient quantity, either by ousting them as
limited partners or by threatening to oust them.
This analysis is in some respects complicated by the fact that,
notwithstanding Respondents' intentions, Ms. Hitchcock, acting as
agent for Respondents Hanlester, PPCL, Omni, and Placer, did
represent to at least some physicians that a physician's
eligibility for ownership of partnership shares would be related
to the amount of business that that physician was willing to
refer. Ms. Hitchcock also communicated to at least some
physicians that limited partners who did not pull their weight in
making referrals would be ousted from the partnerships. Although
Respondents did not intend that Ms. Hitchcock make such
communications (and, in fact, instructed Ms. Hitchcock not to make
them), she nonetheless made them. Physicians who heard Ms.
Hitchcock's sales presentations could have been led to believe
that Ms. Hitchcock was asserting the policy of Respondents
Hanlester, PPCL, Omni, and Placer.
I do not find that the laboratories established by Respondents
PPCL, Omni, and Placer were sham operations established to
disguise payments for referrals of laboratory tests from SKBL to
Respondents, and, ultimately, to limited partners. Respondents'
motives for the way in which they structured the operations of
Respondents PPCL, Omni, and Placer can be explained as legitimate
business objectives, having nothing to do with disguising
payments.
Respondents entered into management agreements with SKBL that
shifted the costs of operating the joint venture laboratories from
Respondents PPCL, Omni, and Placer to SKBL. This was an advantage
for Respondents, because it relieved them of the day-to-day
burdens of laboratory management. The advantage would have
obtained whether PPCL, Omni, and Placer were operated as joint
venture laboratories or under some other form of ownership, such
as single owner proprietorships. The management relationship also
advantaged Respondents by enabling them to advertise Respondents
PPCL, Omni, and Placer as high quality operations without having
to incur the capital costs needed to duplicate that which SKBL was
capable of providing.
Respondents paid SKBL substantial consideration for this
management relationship. The relationship was advantageous to
SKBL because it was potentially profitable, and because it
potentially captured a stream of laboratory tests that would be
ordered by limited partners. However, the evidence does not
establish that SKBL made payments to Respondents in order to
capture this stream of tests.
A. Respondents' relationships to each other
These cases involve the creation and operation of three limited
partnerships, Respondents PPCL, Omni, and Placer. The structure,
ownership, and operation of each of these partnerships was
essentially identical. Each was a limited partnership organized
under California law. Findings 16, 23, 29. These partnerships
were organized to operate clinical laboratories to serve defined
communities within California. Findings 17, 24, 30. The general
partner of Respondent PPCL, Respondent Omni, and Respondent Placer
was Respondent Hanlester, which was also a California partnership.
Findings 4, 18, 25, 31.
The limited partners in Respondents PPCL, Omni, and Placer
essentially consisted of physicians who purchased shares in these
Respondents. The limited partners each had potential liability
equivalent to the value of their respective partnership
shareholdings. All management decisions for the limited
partnerships were made by the general partner, Respondent
Hanlester. Findings 19, 26, 32.
Respondent Hanlester originally had several general partners.
These included Respondents Tasha and Welsh. Finding 6.
Respondent Welsh ceased being a general partner or executive in
Respondent Hanlester in the summer of 1987. Finding 12. The
majority interest in Respondent Hanlester was originally owned by
Hanlester Corporation, a California corporation whose shareholders
included Respondent Lewand. Findings 2, 3, 7. In January 1989,
Hanlester Corporation sold its majority interest in Respondent
Hanlester to Respondent Tasha. Subsequently, Hanlester
Corporation changed its name to Keorle Corporation (Respondent
Keorle). Findings 2, 3, 8.
Respondents Lewand, Tasha, and Welsh each served for a time as
executives in Respondent Hanlester. Until his Summer, 1987
departure, Respondent Welsh was Respondent Hanlester's Vice-
President for Business Development. Finding 11. Respondent Tasha
was Vice-President for Operations. Finding 10. Respondent Lewand
was President of Respondent Hanlester until January 1989. Finding
9.
Respondent Huntsinger was neither an officer, a general partner,
nor an employee of Respondent Hanlester. Although he was listed
in one of Respondent Hanlester's sales brochures as Respondent
Hanlester's medical director, he did not serve in any management
or executive capacity with this Respondent. Respondent Huntsinger
contracted with SKBL to serve as medical director of Respondents
PPCL and Omni. Finding 114. 3/ However, Respondent Huntsinger
did own a substantial limited partnership interest in Respondent
PPCL. Finding 20.
B. Respondents' plans for establishing Respondents PPCL,
Omni, and Placer and for marketing limited partnership shares
Respondents offered potentially lucrative investments to
physicians in order to encourage them to become limited partners
in Respondents PPCL, Omni and Placer, and to refer laboratory
tests to joint venture laboratories. Respondents urged potential
limited partners to refer tests by telling them that such
referrals were a sine qua non for the laboratories' success.
Respondents did not intend to condition ownership of limited
partnership shares on physicians' agreeing to refer business.
Respondents did not intend to link the number of limited
partnership shares that a physician could own to the amount of
business that the physician could refer.
Respondents' intent in creating Respondents PPCL, Omni, and Placer
is evident in the private placement memoranda which they
distributed to prospective limited partners. Respondents'
objective was to create entities which could be marketed to
physicians as attractive investments which would generate income
for Respondents and for the physicians who purchased limited
partnership shares. The key to this strategem was that physician
investors would refer laboratory tests to the joint ventures'
laboratories.
Respondents' strategy for marketing joint venture shares focused
on enlisting as limited partners those physicians who could
potentially refer large numbers of tests to joint venture
laboratories. Findings 80, 81. As Respondents noted in their
private placement memoranda, the joint ventures' laboratories
would initially generate substantially all revenues from tests
ordered by limited partners. Finding 42. The laboratories would
always depend on limited partners' referrals as their primary
source of business. Id.
Respondents sought to make limited partnership investments
attractive to physicians through a number of inducements.
Respondents offered partnership shares at a relatively low price
($500 per share) and in small minimum quantities per investor (the
minimum required purchase was three shares). The minimum limited
partnership investment in Respondents PPCL, Omni, and Placer
therefore was $1500. Findings 34 - 38. Respondents told
potential investors that, assuming the joint ventures succeeded in
attracting significant numbers of limited partners and referred
tests, they could earn relatively high rates of return on their
investments. Possible annual rates of return of 50 percent or
greater were advertised to potential limited partners. Finding
53.
Another significant inducement offered by Respondents to potential
limited partners to invest in Respondents PPCL, Omni, and Placer
was that the investments enabled physicians to earn income
indirectly from referred laboratory tests where they were legally
barred from earning income directly from those tests. In 1984,
Congress enacted legislation which provided that Medicare would
compensate only the party which actually performs or supervises
the performance of a clinical laboratory test. Social Security
Act, section 1833(h)(5)(A). 4/ This provision effectively
barred physicians from claiming reimbursement from Medicare for
tests which they ordered, but which they did not personally
perform or supervise. However, as equitable owners in Respondents
PPCL, Omni, or Placer, physicians could indirectly earn
reimbursement for Medicare-reimbursed laboratory tests in the form
of partnership distributions based on the joint ventures' profits.
As one of the limited partners in Respondent PPCL testified:
[A]t that time Medicare was changing their regulations
wherein the doctor couldn't charge a drawing, handling
and interpretation fee in addition to lab work, which is
how we usually bill lab work to other people . . . .
When Medicare came forward with that regulation, that
obviously indicated an income loss for me, and this was
a way to help recoup some of that.
Tr. at 1452 - 1453.
Respondents also suggested to potential limited partners that the
joint ventures would be affiliated with SKBL, an entity with a
national reputation in the clinical laboratory business. Findings
61, 62. SKBL's reputation for quality and success was a strong
inducement for physicians to invest in the joint ventures.
The evidence does not establish the I.G.'s contention that
Respondents intended to induce physicians to buy partnership
shares in Respondents PPCL, Omni, or Placer by guaranteeing their
investments or by assuring physicians that their investments would
be virtually risk-free. To the contrary, the private placement
memoranda which Respondents provided to potential limited partners
contained extensive recitations of the potential risks of
investment. Findings 54 - 60. Respondents told potential limited
partners that investment in Respondents PPCL, Omni, or Placer
involved a high degree of risk. Finding 56. Potential limited
partners were told not to invest unless they could afford a total
loss of their investment. Finding 57.
The marketing strategy which Respondents developed to sell limited
partnerships drew a line between urging prospective partners to
consider buying into an entity which would generate profits based
on tests that limited partners referred, and telling prospective
partners that they would be required to refer tests as a condition
for investment. The distinction which Respondents drew between
exhorting partners to refer tests and requiring that they refer
tests was neither faint nor subtle. On the one hand, physicians
were told that it was in their economic self-interest to refer
tests to joint venture laboratories. Respondents drove that point
home by telling prospective limited partners that it would be a
"blueprint for failure" of the joint ventures if partners did not
refer tests to joint venture laboratories. I.G. Ex. 2.0; I.G. Ex.
3.0; Finding 44.
On the other hand, Respondents told prospective limited partners
that their decision whether or not to patronize joint venture
laboratories was voluntary. Finding 45. They told physicians
that, under California law, it would be illegal to offer or pay
consideration to a physician to induce or compensate that
physician to refer patients to a laboratory. Finding 47. They
told prospective limited partners their individual earnings from
the joint ventures would not be based on the business they
referred to joint venture laboratories. Finding 48. Respondents
also stressed that, under California law, the joint ventures would
be legal if "the physician's return on his or her investment in
the limited partnership is not measured by the number or value of
his or her referrals." I.G. Ex. 2.0/5.
I am convinced that Respondents intended to preserve this
distinction between encouraging prospective limited partners to
refer business and requiring that they do so as a condition for
investment. Both Respondent Lewand and Mr. Aprahamian, the
attorney who drafted the private placement memoranda, advised
individual Respondents and Ms. Hitchcock that, in marketing
limited partnership shares, no representations could be made to
potential limited partners beyond that which was contained in the
private placement memoranda. Findings 64 - 67, 73 - 79. 5/.
The evidence does not show that either Respondents Lewand, Tasha,
Welsh, or Huntsinger told prospective limited partners in
Respondents PPCL, Omni, or Placer that as a condition of
participation they would have to agree to refer laboratory tests
to joint venture laboratories. Nor is there evidence which proves
that Respondents intended to condition the number of shares a
limited partner could own on the amount of business that the
partner was in a position to refer to a joint venture laboratory.
Respondents were told by Mr. Aprahamian that they could not
condition the number of shares offered to a physician on that
physician's anticipated referrals. Finding 79. Individual
Respondents credibly denied making such a statement to any
prospective limited partners. Finding 110.
The I.G. argues that a letter signed by Respondent Lewand
evidences his and other Respondents' intent to condition ownership
of shares on limited partners' agreement to refer business. I.G.
Ex. 73.0. In this letter, Respondent Lewand represented to a
physician that Respondent PPCL would extend to the physician's
medical partnership the right of first refusal to purchase the
remaining 30 limited partnership shares in Respondent PPCL
contingent on the "full participation" of the medical partnership
in Respondent PPCL. The I.G. contends that this language means
that Respondent Lewand required the medical partnership to
guarantee referral of all of its laboratory tests to Respondent
PPCL as a condition for purchase of the remaining shares.
Respondent Lewand contended in his testimony that the language
simply meant that all of the members of the partnership would be
offered the right to own shares. Tr. at 2024T - 2024V.
The term "full participation" in the letter is ambiguous and could
reasonably be interpreted as either the I.G. or Respondent Lewand
contend. The I.G. did not offer evidence to show that, in fact,
any of the members of the medical partnership did refer all of
their laboratory tests to Respondent PPCL subsequent to purchasing
shares in that Respondent. Absent such evidence, and given the
ambiguity of the letter, I do not find that it proves that
Respondent Lewand conditioned the sale of the remaining shares in
Respondent PPCL on prospective partners agreeing to refer tests to
Respondent PPCL.
C. Ms. Hitchcock's marketing activities
Although Respondents may have been careful to delineate between
encouraging potential limited partners to refer business to joint
venture laboratories and demanding that they do so, Ms. Hitchcock
was not. The I.G. proved that Ms. Hitchcock told prospective
limited partners in her capacity as Respondent Hanlester's Vice
President of Marketing that the number of shares that limited
partners could buy would depend on the amount of business that
they were in a position to refer. Ms. Hitchcock also told
prospective limited partners that if they purchased shares but
then failed to refer business to joint venture laboratories
pressure would be exerted against them either to increase their
referrals or exit the joint ventures.
The I.G. urges that I find Ms. Hitchcock's representations to be
part and parcel of Respondents' marketing and operating plans for
Respondents PPCL, Omni, and Placer. If I were to agree with the
I.G., it would follow that Respondents conditioned the sale of
limited partnership shares in Respondents PPCL, Omni, and Placer
on limited partners agreeing to refer tests to joint venture
laboratories. The I.G. did not prove this contention. The weight
of the evidence is that Ms. Hitchcock pursued a personal agenda in
marketing joint venture shares to prospective limited partners.
Actions taken by Ms. Hitchcock on the apparent authority of
Respondents Hanlester, PPCL, Omni, and Placer were not always
authorized by Respondents and were at times inimical to their
interests.
Much of the I.G.'s evidence as to what Ms. Hitchcock told
prospective limited partners consists of recordings of sales
presentations which Ms. Hitchcock made to physicians in Las Vegas,
Nevada. See I.G. Ex. 109; I.G. Ex. 110. These are not recordings
of presentations made to potential limited partners in Respondents
Hanlester, Omni, and Placer, and Respondents objected to my
receiving them in evidence. However, Ms. Hitchcock testified that
the recorded presentations were similar to the presentations that
she normally gave. Tr. at 1121 - 1122. In light of this
testimony, I find Ms. Hitchcock's recorded sales presentations to
be illustrative of the sales presentations which she made to
prospective limited partners in Respondents PPCL, Omni, and
Placer.
Ms. Hitchcock did not directly state to prospective limited
partners that they must agree to refer business to joint venture
laboratories as a condition for purchasing limited partnership
shares. Finding 97. However, the implication of her presentation
was that the sale of shares was conditioned on the limited
partners agreeing to refer business. She communicated this
condition in two ways. First, Ms. Hitchcock told prospective
limited partners that an "off the record" condition for the sale
of shares was that the number of shares sold to a limited partner
would be based on the anticipated volume of business that the
partner would agree to refer to a joint venture laboratory.
Finding 96. 6/ Second, Ms. Hitchcock told prospective limited
partners that those who did not refer business would be pressured
to either increase their referrals or to sell back their shares to
Respondent Hanlester. Finding 98.
Ms. Hitchcock made other representations to prospective limited
partners that were at variance with what Respondents intended to
communicate. For example, Ms. Hitchcock told prospective limited
partners that the return on their investment in limited
partnership shares virtually would be guaranteed. Finding 95.
She also told prospective limited partners that they could
anticipate annual returns on their investments of 300 percent or
more. Finding 94.
Respondents found it difficult to control Ms. Hitchcock. Ms.
Hitchcock testified that she had a personality conflict with
Respondent Tasha. Tr. at 944. Respondent Lewand testified that
in the Spring of 1988, Respondent Tasha concluded that Ms.
Hitchcock was not controllable. Tr. at 2024J. Respondent Lewand
attempted to personally manage Ms. Hitchcock as an alternative to
discharging her. Id. By November, 1988, Respondent Lewand
concluded that he had no choice but to terminate Ms. Hitchcock's
employment. Tr. at 2024O.
Ms. Hitchcock testified that she had been told by Respondent
Lewand that the only information she could provide potential
limited partners in her sales presentations was that which was
contained in private placement memoranda. Finding 76. Respondent
Lewand testified that he had given this directive to Ms.
Hitchcock. Id. Mr. Aprahamian testified that, on several
occasions, he counseled Ms. Hitchcock not to make representations
beyond those which were contained in the private placement
memoranda. Findings 73 - 76, 79. Similar instructions were
communicated to Ms. Hitchcock by Respondents Tasha and Welsh.
Finding 78. Therefore, what Ms. Hitchcock told limited partners
not only departed from Respondents' private placement memoranda,
it departed from the instructions which Respondents gave her as to
what she could represent.
Ms. Hitchcock personally stood to gain from making unauthorized
representations to prospective limited partners. Part of Ms.
Hitchcock's compensation from Respondent Hanlester consisted of
commissions on limited partnership shares that she sold. Finding
71. It was in her interest to make grandiose representations
concerning possible profits if such representations operated to
convince physicians to purchase limited partnership shares. It
was also in her interest to convince physicians that they must
refer business to joint venture laboratories as a condition for
participation in a limited partnership, because another part of
Ms. Hitchcock's compensation consisted of a percentage of the
dollar volume of tests that physicians referred to the
laboratories. Id.
There is additional evidence that Ms. Hitchcock operated in a
manner which contradicted the interests and directives of
Respondents. The I.G. contends that, as an element of the
unlawful inducement of physicians to refer laboratory tests to
joint venture laboratories, Respondent Lewand loaned money to
physicians so that they could buy shares on favorable terms.
Respondent Lewand did loan the purchase price for shares to three
physicians. Finding 116. However, there is another, more
plausible, explanation for these loans than the one offered by the
I.G. Respondent Lewand testified credibly that, unbeknownst to
him, Ms. Hitchcock had promised some physicians that Respondent
Hanlester would loan them the purchase price of their shares. He
made the loans in order to protect Respondent Hanlester's
reputation in light of the promises that Ms. Hitchcock had made.
Finding 118.
The foregoing is ample and convincing evidence that Respondents
did not authorize Ms. Hitchcock's representations to physicians
conditioning the purchase of joint venture shares on their
agreement to refer laboratory tests. I am further persuaded that
Ms. Hitchcock was acting in an unauthorized way by the fact that,
given the marketing materials which Respondents published, it
would have been foolhardy for them to suggest to physicians that
the purchase of joint venture shares was conditioned on their
agreement to refer business to joint venture laboratories. The
private placement memoranda as much as told physicians that such
requirement would violate California law. Finding 47.
However, Ms. Hitchcock led physicians to believe that she was
acting on the authority of Respondents Hanlester, PPCL, Omni, and
Placer. Her credibility with these physicians was buttressed by
Respondent Hanlester's sales materials, which described her as
one of the "Hanlester principals." I.G. Ex. 3.0. This material
further described her as Respondent Hanlester's Vice President of
Marketing. Id. Although Ms. Hitchcock served in no official
capacity with Respondents PPCL, Omni, or Placer, she represented
herself to physicians as the agent of these entities. Finding 92.
Several physicians testified that they relied on or were
persuaded by Ms. Hitchcock's sales representations. Prospective
limited partners in Respondents PPCL, Omni, and Placer could
reasonably believe that Ms. Hitchcock was acting on the authority
of Respondents Hanlester, PPCL, Omni, and Placer. They could
assume that she was telling the truth when she told them that
referral of business was a condition of owning limited partnership
shares.
D. Respondents' relationships with limited partners
According to the I.G., Respondents conditioned limited partners'
ownership of shares on their ordering tests from joint venture
laboratories. The I.G. argues that Respondents pressured
physicians who became limited partners into ordering tests from
joint venture laboratories. He asserts that Respondents ousted
from the joint ventures those physicians who failed to order
sufficient numbers of tests. He also contends that Respondents
induced limited partners to continue to refer tests to joint
venture laboratories by paying them high rates of return on their
investments.
Much of the evidence offered by the I.G. to establish his
contention that Respondents disciplined limited partners who
failed to order sufficient amounts of tests consists of testimony
by former limited partners concerning telephone conversations that
they had with Respondent Huntsinger and events which transpired
shortly after these conversations took place. The I.G.
established that there were telephone conversations between
Respondent Huntsinger and some limited partners in which
Respondent Huntsinger pressured these physicians to increase the
number of tests they ordered from joint venture laboratories.
Respondents returned partnership investments to a few physicians,
usually after they had engaged in conversations with Respondent
Huntsinger.
Three of the physicians whom the I.G. called to testify about
their telephone conversations with Respondent Huntsinger testified
that, shortly after such conversations, they received unsolicited
refunds of their limited partnership investments from Respondent
Hanlester. These physicians, Drs. Rubin, Luster, and Saraf,
testified to having had unpleasant conversations with Respondent
Huntsinger prior to receiving refunds. See Tr. at 768, 1456.
Several other physicians testified that, after conversations with
Respondent Huntsinger which they described as annoying or
unpleasant, they asked that their partnership investments be
refunded to them, and Respondent Hanlester complied.
An inference arguably can be drawn that these witnesses were
ousted from the joint ventures, from the witnesses' recitation of
their conversations with Respondent Huntsinger and the subsequent
refund of their partnership investments. However, that possible
inference is rebutted in several respects. Based on the weight of
the evidence, I conclude that the I.G. did not prove from the
accounts of Dr. Huntsinger's telephone calls to physicians,
including the conversations with Drs. Rubin, Luster, and Saraf,
that Dr. Huntsinger called physicians in furtherance of a plan by
Respondents to compel physicians to order laboratory tests as a
condition of partnership. Nor did the I.G. prove that investments
were refunded to some physicians because of their failure or
unwillingness to order tests from joint venture laboratories.
The I.G. did not prove that Respondent Huntsinger ever threatened
a limited partner with removal from a joint venture for failure to
refer business. I have no doubt that, in his telephone
conversations with limited partners, Respondent Huntsinger
exhorted them to increase the business that they ordered from
joint venture laboratories. Several physicians testified that
Respondent Huntsinger persistently called them and asked them why
they were not ordering more tests. Finding 127. It is apparent
from these physicians' testimony that they found Respondent
Huntsinger's inquiries to be unseemly and at times rude. Some of
these conversations degenerated into heated arguments. Tr. at
768. However, none of these witnesses testified that Respondent
Huntsinger ever told them that they must order tests from joint
venture laboratories as a condition for remaining limited partners
in Respondent PPCL, Respondent Omni, or Respondent Placer.
The I.G. did not prove that Respondents directed Respondent
Huntsinger to hector partners into ordering more tests or to oust
those who were not ordering enough tests. The evidence as to
instructions Respondent Huntsinger may have had from Respondent
Hanlester or its principals concerning either making calls or the
substance of those calls essentially is that Respondent Tasha
asked Respondent Huntsinger to ascertain from limited partners
whose referrals had decreased what problems they were experiencing
with the quality and timeliness of the laboratories' service.
Findings 124 - 126. Respondent Huntsinger testified that he did
have authority to offer unhappy partners the return of their
investments. Tr. at 2348.
The I.G. did not prove that Respondent Huntsinger systematically
called those limited partners who ordered relatively few tests.
Further, there is little probative evidence as to the substance of
Respondent Huntsinger's communications to Respondents about his
telephone conversations, apart from Respondent Huntsinger's
recollections that some physicians expressed unhappiness about the
operations of the laboratories. Tr. at 2348 - 2355. Such
evidence would have been significant, inasmuch as Respondent
Huntsinger was not a principal in or employed by Respondent
Hanlester. There is no evidence to show what, if any, authority
he had to make decisions concerning partnership status on behalf
of Respondent Hanlester, beyond having the authority to offer
unhappy partners the refund of their investments.
Respondent Huntsinger had reasons to call limited partners other
than to assert discipline, and his motives may have been
misinterpreted by some of these partners. Respondent Huntsinger
may also have misinterpreted the communications he received from
some limited partners. Respondent Huntsinger was retained by SKBL
as medical director of Respondents PPCL and Omni. Finding 114.
Respondent Huntsinger contacted limited partners in his capacity
as medical director to attempt to resolve problems that they were
having with the joint venture laboratories' services. These calls
were placed at a time when there were significant problems with
laboratory services. Findings 121 - 123. Given the context of
these calls, it is not unreasonable to infer that at least some
limited partners would have given Respondent Huntsinger a piece of
their minds concerning the problems they were experiencing. Given
their annoyance with the manner in which the laboratories were
operating, these physicians could easily have read more into
Respondent Huntsinger's communications than what he intended. It
is reasonable to conclude that Respondent Huntsinger interpreted
these physicians' anger as a request to have their investments
returned to them.
The most logical explanation for Respondents' refunding
partnership investments to Drs. Rubin, Luster, and Saraf is that
Respondents and these physicians misunderstood each other. It is
evident from these physicians' testimony of their conversations
with Dr. Huntsinger that the tone of these conversations was
unpleasant. Dr. Rubin testified that he told Dr. Huntsinger to
"go f___ himself." Tr. at 768. Dr. Huntsinger easily might have
interpreted this expletive as a demand to be excused from the
partnership. It is unclear that Drs. Rubin, Luster, and Saraf
wanted to remain limited partners after this telephone
conversation with Dr. Huntsinger. None of these physicians asked
or demanded that Respondents reinstate them after he received the
refund of his investment.
Other evidence offered by the I.G. about Respondents'
communications with limited partners and their motives for making
such communications is neither persuasive, in and of itself, nor
in combination with other evidence, including the evidence
relating to Respondent Huntsinger's telephone calls. One SKBL
employee testified that, based on a conversation he had with
Respondent Tasha, he inferred that partners who failed to order
business from joint venture laboratories would be ousted from the
partnerships. Tr. at 543 - 544. Another witness, Dr. ReVille (a
limited partner), testified Respondent Tasha told him "something
on . . . (the) order" that ways would be found to have "non-heavy"
producers in joint venture laboratories use their money more
effectively. Tr. at 1439. A third witness, Paul Rust, an SKBL
employee, testified that it was his understanding from
conversations he had with Respondent Tasha and others that limited
partners would be ousted from the joint ventures for failure to
make use of the joint ventures' laboratories. Tr. at 507. The
I.G. also adduced testimony that Respondent Tasha had stated that
he expected limited partners to make use of joint venture
laboratories. Tr. at 783.
I am not persuaded by this testimony for several reasons. First,
the fact that a Respondent may have expected limited partners to
patronize joint venture laboratories does not, by itself, permit
an inference to be drawn that Respondents conditioned ownership of
limited partnership shares on partners' agreements to patronize
the laboratories. Nor does it suggest that Respondents intended
to discipline those partners who did not order tests from the
laboratories. An underlying premise of the joint ventures was
that partners would use the laboratories. But that would be so
whether Respondents envisioned partners voluntarily using the
laboratories or being compelled to do so.
Second, the witnesses' recollections of what Respondent Tasha may
have said were not precise and were in critical respects
contradicted by other evidence. For example, Dr. ReVille
contradicted his own testimony by testifying that he purchased
limited partnership shares as an investment and did not consider
himself obligated to patronize joint venture laboratories. Tr. at
1442.
Finally, Respondents credibly denied that they had conditioned
ownership of partnership shares on purchasers' agreements to refer
business. Their testimony was consistent with what was contained
in Respondent Hanlester's offering statements and Mr. Aprahamian's
testimony.
The I.G. offered the testimony of SKBL employees that Respondents
had ousted some limited partners who had not ordered sufficient
business. This testimony is less than compelling. None of these
witnesses had any direct knowledge of Respondents' actions. For
the most part, their testimony was based on assumptions formed
from conversations with other individuals. For example, Mr. Rust
prepared an internal presentation for other SKBL employees which
asserted that Respondent Hanlester had "booted out" eight limited
partners. See I.G. Ex. 39.0; Tr. at 429 - 432. This witness'
conclusion in his presentation was based on conversations that he
may have had with another SKBL employee or Respondent Tasha, and
not on direct knowledge. Tr. at 502 - 503, 505, 510. Mr. Rust
could not precisely recall what he had been told concerning
partners' ouster or who communicated the information to him. Both
the SKBL employee from whom the witness thought he obtained the
information that limited partners had been ousted and Respondent
Tasha denied ever communicating such information. Tr. at 2126,
2217.
Another SKBL employee testified that she had been told by Ms.
Hitchcock that a limited partner could be "cancelled" by
Respondent Hanlester for insufficient use of a joint venture
laboratory. Tr. at 806. However, that same employee testified
that Respondent Tasha had told her that Respondent Hanlester could
not "cancel" a limited partner. Tr. at 836 - 837.
The I.G. also offered the testimony of a physician, Dr. Bond, who
had been a limited partner in Respondent PPCL. Dr. Bond testified
that, at a meeting of limited partners, an individual whom he
thought might have been Respondent Lewand stated that Respondent
Hanlester would repurchase the shares of partners who could not
utilize joint venture laboratories. Tr. at 1641. Dr. Bond could
not recall the precise statement which this individual made.
Respondent Lewand, on the other hand, denied saying that non-
contributing partners would be bought out. He testified that he
had told the participants at that meeting that the basis for
Respondent Hanlester repurchasing a partner's shares would be that
partner's death, retirement, closing his practice, or if 51
percent of the partners agreed that it would be detrimental to the
partnership's interest for the limited partner to remain. Finding
135.
Although it is evident that many people attended this meeting, and
several may have heard Respondent Lewand's statement, the I.G. did
not produce any witness to that statement besides Dr. Bond. 7/
I do not conclude that Respondent Lewand told the participants at
the meeting that Respondent Hanlester would buy back the shares of
a partner who failed to contribute business to a joint venture
laboratory. I base my conclusion on his forceful denial, Dr.
Bond's less-than-complete recall of the statement, and the I.G.'s
failure to produce testimony which would more clearly recount what
Respondent Lewand said.
The I.G. also offered evidence to show that Respondent Hanlester
maintained charts and other records to monitor the number of tests
ordered by limited partners in the joint ventures. Finding 119.
The I.G. argues that I should infer that the purpose of such
monitoring was to track partners' utilization in order to
discipline those partners who did not order sufficient business
from joint venture laboratories. I do not draw that inference,
because there exists a more plausible and benign explanation for
this practice.
As I note above, the joint venture laboratories depended on the
business generated by limited partners. These partners were the
laboratories' preferred customers. A significant decline in any
limited partner's utilization of a joint venture laboratory would
serve as a warning signal to the laboratory that there was a
problem with the service provided to that partner, and possibly,
with service in general. Given that, it would be a normal and
rational business practice for the laboratories to monitor
partners' utilization rates. I do not attach significance to the
fact that the joint ventures were not devoting similar efforts to
monitor non-partners' business. These accounts comprised only a
small percentage of the joint ventures' business, and a decline in
utilization by a non-partner would not necessarily signal the
existence of a meaningful problem. Respondents would not have
obtained the intelligence about their operations from monitoring
non-partners' accounts that they obtained from monitoring
partners' accounts.
Perhaps the most compelling reason for concluding that the I.G.
did not prove that Respondents disciplined limited partners who
failed or refused to order tests is the I.G.'s failure to offer
any meaningful evidence, aside from the testimony of Drs. Rubin,
Luster, and Saraf, that Respondents actually ousted anyone. 8/
More than one hundred physicians became limited partners in
Respondent PPCL, Respondent Omni, or Respondent Placer.
Respondent PPCL was in operation for nearly three years prior to
the commencement of these cases. Respondents Omni and Placer were
in operation for nearly two years. A number of limited partners
ended their investments in these Respondents. However, the I.G.
failed to introduce evidence as to specifically which partners had
left the partnerships, or the reasons for their doing so. The
I.G. did not offer any evidence to correlate those partners who
did leave the partnerships with the amount of business they had
ordered, or to compare their laboratory utilization with that of
partners remained.
In contrast, there is evidence which shows that Respondents
tolerated limited partners who did not order substantial tests
from joint venture laboratories. Some limited partners ordered
few tests and remained partners in good standing. Finding 139.
There was little correlation between limited partners' ownership
interests and the number or value of the tests that they ordered.
See I.G. Ex. 14.0, 65.0, 68.0; Ha Ex. 57.
I am not persuaded that Respondents paid limited partners an
unusually high rate of return on their investments in order to
induce them to refer business to joint venture laboratories. The
I.G. failed to prove that Respondents' distribution to limited
partners was atypically high when compared to distributions to
limited partners from other health care joint ventures. Finding
200; Tr. at 208 - 209. Moreover, no partner's return was directly
related to the amount of tests that that partner ordered from a
joint venture laboratory. Finding 196. Respondents PPCL, Omni,
and Placer made distributions to each limited partner based on net
profits and on that partner's equitable ownership interest.
Finding 195. Each partner's equitable ownership interest was
based on the number of shares the partner owned. A partner could
order no tests, or the partner could order many tests, without
directly affecting his or her partnership distribution.
E. The relationship between Respondents Hanlester, PPCL,
Omni, Placer, and SKBL
The I.G. makes two assertions concerning the management
relationship between Respondents Hanlester, PPCL, Omni, Placer,
and SKBL. First, the I.G. contends that, as a consequence of this
management relationship, the joint venture laboratories were
"fraudulent" operations which performed no meaningful functions.
The I.G. argues that Respondents assumed no operating risks or
meaningful costs under the management agreements. Respondents
PPCL, Omni, and Placer, merely functioned as conduits for monies
to be paid to physicians to induce them to refer business,
according to the I.G. Second, the I.G. argues that the management
agreements concealed "indirect" remuneration from SKBL to
Respondents in return for the referral of tests from Respondents
PPCL, Omni, and Placer, to SKBL.
The management relationship between Respondents Hanlester, PPCL,
Omni, Placer and SKBL provided advantages to all parties. The
principal advantage to Respondents was that it enabled them to
shed most of the day-to-day operating responsibilities for the
joint ventures' laboratories, albeit for a substantial price. The
principal advantage to SKBL was that, in return for undertaking to
manage the laboratories, SKBL received substantial compensation
based on a stream of referrals. However, neither Respondents or
SKBL operated pursuant to a hidden agenda. I am not persuaded
that, on close scrutiny, evidence as to the management
relationship between Respondents and SKBL contributes
significantly to the I.G.'s claim that Respondents paid
remuneration to limited partners to induce them to refer business.
The I.G. did not prove that Respondents received remuneration
from SKBL in return for referring business. To the contrary, the
evidence shows that Respondents remunerated SKBL for its
management services.
The management relationship was memorialized in a master
laboratory services agreement between Respondent Hanlester and
SKBL, and in laboratory management agreements between Respondents
Hanlester, PPCL, Omni, and Placer, and SKBL. Findings 143, 146,
160, 162. In the master laboratory services agreement, SKBL
promised to provide laboratory management services to all joint
venture laboratories in which Respondent Hanlester had an
ownership interest. Finding 145.
The laboratory management agreements specified the terms on which
SKBL would manage laboratories owned by Respondents PPCL, Omni,
and Placer. Respondents PPCL, Omni and Placer were required to
provide facilities and equipment necessary for the operation of
clinical laboratories. Finding 147. These Respondents were
required to repair and maintain laboratory space and to pay
utility charges. SKBL was obligated to provide and compensate all
staff necessary to operate the joint venture laboratories, to
supervise the laboratories' administrative and operational
activities, and to conduct all billing and collection activities
on the laboratories' behalf. Findings 149 - 153. SKBL was to be
compensated for its management of each joint venture's laboratory
with a monthly management fee from each joint venture of 76
percent of net cash receipts. Findings 154, 155.
The effect of this relationship was to relieve Respondents
Hanlester, PPCL, Omni, and Placer of the day-to-day
responsibilities for operating joint venture laboratories. SKBL
had the contractual duty to staff and operate the joint venture
laboratories. To the extent that problems in administering these
laboratories arose, SKBL had the obligation to resolve them.
SKBL opted to refer most of the tests ordered from Respondents
PPCL, Omni, and Placer to its own central processing facilities in
Van Nuys and Dublin, California. Findings 181 - 183. SKBL could
have elected to perform all tests at facilities operated by
Respondents PPCL, Omni, and Placer. The I.G. argues that SKBL's
decision to refer most of the PPCL, Omni, and Placer laboratory
tests to central processing facilities proves that these
Respondents' laboratories were sham operations whose principal
function was to serve as a conduit of monies to remunerate
physicians for referring tests.
The I.G. further asserts that the management arrangement with SKBL
facilitated Respondents' payments to obtain referrals, because it
eliminated all meaningful risk and costs to Respondents.
According to the I.G., the true nature of the relationship between
SKBL and Respondents becomes apparent on close examination of the
structure and operations of the joint ventures' laboratories.
This assertion devolves into a contention that the laboratories
were "shells" which performed no meaningful function. According
to the I.G., they were used by Respondents and SKBL to conceal a
relationship wherein laboratory tests ordered by limited partners
were purchased en masse from Respondents by SKBL. The I.G.
asserts, in effect, that the revenues from these tests were
"laundered" by Respondents to make it look as if they were
revenues received from tests which Respondents performed.
I disagree with the I.G.'s contentions. There is no evidence
which shows that the relationship between SKBL and Respondents was
intended to conceal payments or to "launder" payments from SKBL
through Respondents to physicians in return for referrals. The
decisions which Respondents and SKBL made concerning the
management of Respondents PPCL, Omni, and Placer reflect
relatively common practices in the health care industry which have
legitimate business objectives unrelated to payment for referred
business.
The management relationship between Respondents and SKBL does not,
on its face, suggest fraudulent intent. The fact that Respondents
PPCL, Omni, and Placer contracted with SKBL to have SKBL manage
their operations reflects a relatively common practice in the
clinical laboratory field. It is not unusual for a company like
SKBL to agree to manage a laboratory. Tr. at 185, 191. It is not
unusual for an independent clinical laboratory, like Respondents
PPCL, Omni, and Placer, to refer business to a larger laboratory.
Finding 185.
SKBL's decision to centrally process the joint ventures'
laboratory tests can be explained by rational economic
considerations having nothing to do with the issue of payments to
limited partners. Efficiency considerations drove SKBL's decision
to refer tests to its central facilities. Findings 184 - 186. It
was in SKBL's pecuniary interest to process tests as efficiently
as possible. Its profits depended on the extent to which its
administrative and operating costs for the joint ventures'
laboratories fell below 76 percent of the laboratories' revenues.
Finding 166. SKBL decided that it could more economically
process tests centrally than it could process them at the joint
venture laboratories. SKBL could have exercised the same
discretion under the management agreements irrespective of the
structure and ownership of Respondents PPCL, Omni, and Placer.
For example, the identical efficiency considerations would have
pertained under the management agreements had these Respondents
been single-owner proprietorships.
It is not true that the management agreements eliminated all
meaningful costs to Respondents Hanlester, PPCL, Omni, and Placer.
Under these agreements, Respondents assumed substantial costs. A
small but not insignificant percentage of the tests ordered from
Respondents PPCL, Omni, and Placer were performed at these joint
ventures' laboratories. Findings 188 - 190. Respondents were
required to purchase and maintain sufficient equipment so that the
joint venture laboratories were equipped to perform those tests.
Finding 147. The joint ventures were also required to furnish and
maintain laboratory space and to pay utility charges. Finding
149.
The greatest cost assumed by Respondents was the cost of
compensating SKBL for its services. The compensation which
Respondents paid to SKBL for its services comprised substantial
costs which were rationally related to the expenditures necessary
to operate the joint ventures. It simply begs the question of
whether these payments were a meaningful cost to Respondents to
argue that the management agreements saved them the costs of
staffing and operating laboratories.
Nor is it true that the management agreements eliminated
Respondents' business risk. Respondents placed the responsibility
for running the joint ventures in the hands of SKBL. That
decision was to Respondents' advantage only insofar as SKBL
operated the laboratories in a manner which satisfied the
laboratories' customers, who essentially were limited partners.
Finding 167. Failure by SKBL to satisfy these limited partners by
providing timely and efficient service would jeopardize these
partners' loyalty to the joint ventures' laboratories and could,
in turn, cause Respondents to experience a loss in business and
revenues.
In fact, there is evidence that SKBL's management of the
laboratories was, at least for a time, less than optimal.
Respondents PPCL, Omni, and Placer experienced problems both with
the timeliness of their tests and with billing for services.
Findings 121 - 123; Ha Ex. 40; Tr. at 1478, 1487. At least one
partner in Respondent Omni sold back his partnership share to
Respondent Hanlester because of billing problems. Tr. at 1794 -
1795.
Perhaps the greatest risk assumed by Respondents in entrusting
management of Respondents PPCL, Omni, and Placer to SKBL is that
the relationship would fail altogether. See Tr. at 212 - 213.
The management agreements provided either party with the option to
terminate the agreement upon 90 days' notice. See I.G. Ex. 4.1/8.
A decision by SKBL to pull out of the relationship with
Respondents would likely cause collapse of the limited
partnerships. Respondents emphasized the SKBL relationship as a
selling point in marketing limited partnership shares. The
relationship was a critical element in persuading physicians to
become limited partners. As the I.G.'s expert, Thomas L. Kelly,
testified:
It is my opinion that the SmithKline arrangement was a
substantial contributor to the marketability of the
limited partnership units and it may well have been
unmarketable without the SmithKline arrangement.
Tr. at 136.
The I.G. argues that the agreements with SKBL concealed an
"indirect" remuneration from SKBL to Respondents to pay for
referrals of laboratory tests from limited partners. According to
the I.G., the value of the payments given to Respondents from SKBL
greatly exceeded the fair market value of the services provided by
the joint venture laboratories. Therefore, according to the I.G.,
an inference can be drawn that SKBL was remunerating Respondents
for the referrals of laboratory tests ordered by limited partners.
This argument is fatally flawed, because it fundamentally
mischaracterizes the relationship between Respondents Hanlester,
PPCL, Omni, Placer, and SKBL. SKBL did not purchase tests from
Respondents, nor did it compensate Respondents for services
provided by joint venture laboratories. To the contrary,
Respondents compensated SKBL for the services it provided.
As I find supra, this compensation was substantial, consisting
of 76 percent of monthly revenues from each joint venture. I find
nothing in the management agreements or in the parties' face-to-
face relationships to suggest that Respondents received any
remuneration from SKBL for referred business.
The I.G. asserts that unlawful payments can be discerned in the
manner in which SKBL distributed revenues to Respondents PPCL,
Omni, and Placer. The I.G. contends that these distributions
manifest an intent by SKBL to pay Respondents for referrals. The
I.G. also argues that the distributions enabled Respondents in
turn to pay limited partners for referrals.
Pursuant to the management agreements, SKBL deposited the receipts
earned by Respondents PPCL, Omni, and Placer into separate
accounts which SKBL maintained for each of these Respondents.
Findings 168, 169. SKBL made revenue distributions to Respondents
PPCL, Omni, and Placer, from these accounts. Finding 170. In
October, 1987, SKBL decided to make distributions to Respondent
PPCL based on expected revenue (based on tests performed and
billed for) rather than on actual receipts. Subsequently, SKBL
distributed revenues to Respondents Omni and Placer based on the
same formula. Findings 171, 176. SKBL continued to make
distributions to the joint ventures based on this formula
throughout the life of its management agreements with these
Respondents.
The I.G. contends that payments made on this "accrual" basis
overstated the distributions that Respondents and, ultimately,
limited partners were entitled to receive. The I.G. argues that
such distributions were, in effect, payments from SKBL to
Respondents in return for referrals. He asserts that Respondents
were able to induce referrals from physicians by redistributing
the "extra" compensation they received from SKBL in the form of
partnership returns.
This analysis is not supported by the evidence. It is true
that the "accrual" distributions made by SKBL to Respondents PPCL,
Omni, and Placer initially were greater than what would have been
distributed based on actual revenues. Finding 172. Such
distributions certainly enabled Respondents to make greater
initial partnership distributions than had distributions from SKBL
been based on actual collections. Finding 179. However, the
"accrual" distribution system did not require SKBL to make greater
total distributions to Respondents PPCL, Omni, and Placer than it
had otherwise agreed to make pursuant to the management
agreements. Finding 178. Nor did it permit Respondents to make
greater total distributions to their limited partners than would
otherwise have been possible. Finding 180.
SKBL treated the difference between what it distributed based on
the "accrual" system and what it had actually collected in
laboratory revenues as an advance against future distributions.
Finding 173. SKBL intended eventually to recoup from Respondents
that which it had advanced. Id. Although the "accrual"
distributions from SKBL to Respondents can be characterized as a
loan against future revenues, they cannot be characterized as a
payment for referrals. 9/
III. The meaning of section 1128B(b)(2) of the Act
Much of the I.G.'s case against Respondents hinges on his
contentions concerning the interpretation of section 1128B(b)(2).
If, as the I.G. contends, section 1128B(b)(2) proscribes an offer
or payment to induce a party to refer program-related business,
without regard to whether the offer is conditioned on the
offeree's promise to refer program-related business, then the I.G.
need not prove that the offers to sell limited partnership
interests in this case were conditioned on physicians agreeing to
refer business to the joint venture laboratories.
If the I.G.'s interpretation of section 1128B(b)(2) is correct,
then Respondents violated the Act by offering payments to
physicians in the form of returns on the physicians' limited
partnership investments and by urging those physicians to refer
business to the joint venture laboratories. Respondents concede
that they advised prospective purchasers of limited partnership
interests that it would be in their pecuniary interest to refer
business to the joint venture laboratories. The sales materials
furnished by Respondents to potential participants told them that
not referring tests to the laboratories would be a "blueprint for
failure" of the joint ventures. I.G. Ex. 2.0/6.
The I.G.'s interpretation would not only direct a finding that
Respondents violated the Act, but it would also seem to imperil an
array of transactions in the health care field which involve
program-related business. The I.G.'s interpretation would
threaten any joint venture among health care providers whose
structure and compensation formulas encouraged participants to
refer business to the joint ventures even if such joint ventures
do not require referrals as a quid quo pro for participation.
I conclude that, in enacting section 1128B(b)(2), Congress
prohibited agreements by health care providers which precluded
them from making choices which were in the financial or quality of
care interest of federally-funded health care programs and their
beneficiaries and recipients. These prohibited agreements
included bribes, kickbacks, and rebates, and similar arrangements.
The unifying characteristic of the conduct which Congress
proscribed is that it consists of offers of agreements or
agreements which foreclose the options of health care providers to
order services which are cost-efficient and which are of the best
quality. Offers or payments that were intended to influence
provider choice, as opposed to agreements which foreclosed
provider choice, are not within the scope of the legislative
prohibition. 10/
An essential element of a violation under section 1128B(b)(2) is
the offer of an agreement or an agreement to refer program-related
business. The section does not proscribe offers or payments which
may be calculated to encourage offerees to refer business but
which do not require referrals as a condition for payment.
A. The evolution and history of section 1128B(b)
The evolution and history of the Act demonstrates that, in
enacting section 1128B(b), Congress was concerned with offers and
agreements to pay kickbacks as a quid pro quo for referred
business. There is nothing which suggests that Congress intended
the Act to proscribe arrangements which encouraged parties to make
referrals as opposed to unethical agreements which required such
referrals.
The original version of the Act, adopted in 1972, made it unlawful
for a party to solicit, offer, or receive any kickback or bribe in
connection with the furnishing of a program related item or
service. It also made it unlawful for a party to solicit, offer,
or receive a rebate of any fee or charge for referring a program
beneficiary to another person for the furnishing of an item or
service. Pub. L. No. 92-603, 242(b), 86 Stat. 1329, 1419
(1972). 11/
The legislative history to the 1972 Act shows that Congress was
concerned with prohibiting unethical or anticompetitive
agreements:
Your committee believes that a specific provision
defining acts subject to penalty under the Medicare and
Medicaid programs should be included to provide
penalties for certain practices which have long been
regarded by professional organizations as unethical, as
well as unlawful in some jurisdictions, and which
contribute appreciably to the cost of the Medicare and
Medicaid programs. Thus, under the committee bill, the
criminal penalty provision would include such practices
as the soliciting, offering, or accepting of kickbacks
or bribes, including the rebating of a portion of a fee
or charge for a patient referral, involving providers of
health care services.
H.R. Rep. No. 92-231, 92nd Cong., 1st Sess. 107-108 (1971),
reprinted in 1971 U.S. Cong. Code & Admin. News 4989, 5093
(emphasis added).
The current language of section 1128B(b), originally adopted in
1977, broadened the scope of prohibited conduct by defining it to
consist of the knowing and willful payment of "any remuneration
(including any kickback, bribe, or rebate) directly or indirectly,
overtly or covertly, in cash or in kind." Social Security Act,
section 1128B(b)(1), (2). Under the current language, prohibited
remuneration includes, but is not limited to, bribes, kickbacks,
and rebates. Congress intended the Act to proscribe all forms of
this traditionally unethical conduct. However, neither the
revisions nor the legislative history suggest that Congress ever
intended the Act to proscribe forms of conduct which were beyond
the ambit of that which was traditionally viewed as
anticompetitive or unethical, including kickbacks, bribes, or
rebates. In particular, neither the revisions nor legislative
history suggest that Congress intended to proscribe conduct which
encouraged providers to refer program-related business.
Congress felt it necessary to revise the Act because the Act did
not effectively reach the unethical or anticompetitive conduct
that it had intended to prohibit. H.R. Rep. No. 95-393 (II), 95th
Cong., 1st Sess. 53 (1977) reprinted in U.S. Cong. Code & Admin.
News 3039, 3055. Congressional committees expressed concern that
fraudulent or unethical agreements were being disguised in a way
which concealed their purpose. H.R. Rep. No. 95-393, supra. For
example, the Senate Special Committee on Aging, in a 1977
committee report, found that kickbacks remained a problem despite
enactment of the 1972 Act. The Committee found overwhelming
evidence that:
(M)any pharmacists are required to pay kickbacks to
nursing home operators as a precondition of obtaining a
nursing home's business. Pharmacists also must pay
rebates to practitioners or other owners of medicaid
mills, the small `shared health care facilities' which
checker the ghettos of our major cities.
Kickbacks Among Medicaid Providers, S. Rep. No. 320, 95th Cong.,
1st Sess. (1977), at 28. (emphasis added). The committee also
found that:
It is evident that kickbacks are frequently required from
clinical laboratories if they hope to obtain the
business of both medicaid mills and nursing homes.
Committee investigators are convinced that laboratories
are barred from obtaining a medicaid account unless they
pay kickbacks.
Id. (emphasis added).
The committee's report extensively detailed circumstances where
pharmacies were coerced by nursing homes into paying kickbacks as
a condition for receiving the homes' business. It also detailed
circumstances where laboratories covertly offered payments to
physicians to obtain the physicians' agreements to refer Medicaid
business.
In an earlier report, the committee found that kickbacks by
clinical laboratories to physicians to obtain Medicaid business
continued despite the 1972 Act. Fraud and Abuse Among Clinical
Laboratories, S. Rep. No. 94-944, 94th Cong., 2d Sess. (1976).
The Committee surveyed practices in several states and concluded
that the payment of kickbacks by laboratories in order to obtain
physicians' business was an uncontrolled problem.
It appears to the subcommittee -- based upon firsthand
investigation and analyses of findings from other States
-- that kickbacks are so rampant that laboratories are
almost barred from obtaining a Medicaid account unless
they offer a kickback.
Id. at 47 (emphasis added).
My conclusion that Congress did not intend section 1128B(b) to
prohibit conduct which encourages providers to refer program-
related business is reinforced by its recent enactment of
legislation which prohibits some forms of business that encourage
referrals. Congress would have had no need to enact such
legislation if section 1128B(b) already prohibited such
arrangements. In 1989, Congress enacted section 6204 of the
Omnibus Budget Reconciliation Act of 1989. This section, which
became section 1877 of the Act, and which becomes effective in
1992, prohibits a physician who has either an ownership interest
in or a compensation arrangement with an entity such as a
laboratory, from making any referrals of Medicare business to that
entity. It appears that this section will, when effectuated in
1992, bar physicians from making Medicare-reimbursable referrals
to clinical laboratories in which they have an ownership interest.
The new law is aimed at arrangements which encourage providers to
make referrals.
B. Statutory language and construction
The language of the Act and the manner in which the courts have
applied it demonstrate that Congress prohibited agreements to
refer program-related business. The Act cannot reasonably be
interpreted to prohibit offers or payments which are intended to
encourage referrals but which are not conditioned on referrals of
program-related business.
In interpreting and applying section 1128B(b), I must apply the
same rules of construction as would be applied by a federal court
in a criminal enforcement proceeding. Section 1128B(b) is a
criminal statute and therefore must be construed narrowly. This
case arises by virtue of the fact that in 1987 Congress expanded
section 1128 of the Act to include exclusion of individuals and
entities who were found to have violated section 1128B(b). Social
Security Act, section 1128(b)(7). Congress provided that, in such
cases, the petitioner would ordinarily be entitled to a hearing
before an administrative law judge before the exclusion could be
effectuated. Social Security Act, section 1128(f)(2). Congress
did not provide that section 1128B(b) should be interpreted or
applied more broadly in civil proceedings under sections
1128(b)(7) and (f)(2) than in criminal enforcement proceedings in
federal courts.
It is an accepted maxim of statutory interpretation that criminal
statutes should ordinarily be construed narrowly. United States
v. Emmons, 410 U.S. 396, 411 (1973). That rule governs my
interpretation of the Act, because I am applying a criminal
statute in a civil remedies proceeding. Application of the rule
does not mean that I should interpret the Act so narrowly as to
frustrate the intent of Congress. On the other hand, I should not
overreach to extend the boundaries of the Act into areas which are
beyond what Congress intended to prohibit.
I am particularly concerned that I not apply the Act in a manner
which exceeds the reach established by federal courts in criminal
cases because to do so would risk creating an "administrative"
interpretation of the Act which is not accepted beyond the
corridors of the Department. There is nothing in the letter of
the Act or in its history to suggest that Congress intended that
there exist divergent criminal and administrative interpretations.
Congress did not define the term "any remuneration" in its 1977
revision. Absent a statutory definition, this term ought to be
assigned its common and ordinary meaning. Webster's Third New
International Dictionary (1969) defines "remuneration" to include
the act or fact of remunerating. It defines "remunerate" as:
1: to pay an equivalent for (as a service, loss, expense)
2: to pay an equivalent to (a person) for a service,
loss, or expense . . . .
The common and ordinary meaning of "remuneration" therefore is a
payment in return for a service, loss, or expense. As used within
section 1128B(b), the term means payment in return for a quid pro
quo. 12/
In its 1977 revision Congress qualified the term "any
remuneration" with the words "kickback," "bribe," and
"rebate."
The juxtaposition of these terms in the Act means that Congress
intended that the term "any remuneration" not only include
kickbacks, bribes or rebates, but that proscribed remuneration be
of a character similar to kickbacks, bribes, or rebates.
An established tenet of statutory construction is that words in
statutes should be construed in light of the words with which they
are associated. Schrieber v. Burlington Northern, Inc., 472 U.S.
1, 8 (1985); Auto-Ordinance Corp. v. United States, 822 F.2d 1566,
1571 (Fed. Cir. 1987). Similarly, general terms in statutes
should be read to mean things which are similar to those things
which are specifically enumerated as illustrative of the general
terms. Central Forwarding, Inc. v. Interstate Commerce
Commission, 698 F.2d 1266, 1279 (5th Cir. 1983); Trinity Services,
Inc. v. Marshall, 593 F.2d 1250, 1258 (D.C. Cir. 1978); See
Harrison v. PPG Industries, Inc., 446 U.S. 578, 588, (1980).
Application of these principles to the language of section
1128B(b) reinforces the conclusion that "any remuneration" means
traditionally unethical agreements, such as agreements to pay
bribes, kickbacks, or rebates.
I find that Congress' use of the words "kickback," "bribe,"
and
"rebate" to qualify the term "any remuneration" is further
evidence that Congress intended to proscribe agreements to refer
business. As shall be discussed infra, in every case where the
courts have found such unlawful remuneration, the underlying
misconduct consists of offers of agreements or agreements to refer
program-related business.
Courts use words like "kickback" and "bribe" to mean offers
or
agreements to make payments in exchange for something given in
return. For example, in United States v. Hancock, 604 F.2d 999
(7th Cir. 1979), the court stated that "kickback" is:
commonly used and understood to include "a percentage payment
. . . for granting assistance by one in a position to open up
or control a source of income," Webster's Third New
International Dictionary (1966), and we think it was used in
the statute to include such a payment.
604 F.2d at 1002. The unlawful scheme in Hancock consisted of
payments to physicians in return for sending medical specimens to
laboratories. The term "bribery" has been defined to mean the
voluntary giving of anything of value in corrupt payment for an
official act done or to be done. United States v. Zacher, 586 F.
2d 912, 914 (2d Cir. 1981). Thus, the terms used by Congress to
describe prohibited payments, including "remuneration,"
"kickback," "bribe," and "rebate" have commonly
been defined to
mean agreements to pay something in exchange for something of
value.
The purpose of section 1128B(b)(2) to prohibit agreements to refer
program-related business becomes more apparent when that section
is read in context with the other parts of section 1128B(b).
Section 1128B(b)(2) is aimed at the offerors and payors of
remuneration to induce referrals. The other side of the equation
is addressed by section 1128B(b)(1), which prohibits parties from
knowingly and willfully soliciting or receiving any remuneration,
including any kickback, bribe, or rebate "in return for" referring
program-related business (emphasis added). Congress' intent to
prohibit offers and payments of remuneration for agreements to
refer business in section 1128B(b)(2) is evident when sections
1128B(b)(1) and 1128(B)(b)(2) are read in pari materia, because
section 1128B(b)(1) plainly prohibits agreements. Given the law's
history and the meaning of its language, there would be no point
in giving asymmetrical application to the two sections. 13/
Furthermore, the only subsection of section 1128B(b) which is even
arguably ambiguous as to what Congress intended to prohibit is
subsection 1128B(b)(2)(A), which prohibits payments of
remuneration to induce a person:
to refer an individual to a person for the furnishing or
arranging for the furnishing of any item or service for
which payment may be made . . . .
This subsection, when read in isolation, could be construed to
support the I.G.'s "inducement equals encouragement" theory of
unlawfulness. However, subsection 1128B(b)(2)(B), which is also
aimed at the offeror or payer of remuneration, prohibits payments
of remuneration to induce a person:
to purchase, lease, order, or arrange for or recommend
purchasing, leasing, or ordering any good, facility,
service, or item for which payment may be made . . . .
As with section 1128B(b)(1), the plain meaning of this language is
that payments to induce agreements to refer business are unlawful.
Therefore, the I.G.'s statutory construction argument reduces to
relying on the wording of one arguably ambiguous subsection of the
Act. Any possible ambiguity in that subsection is eliminated when
it is read in context, as it should be.
C. Judicial application of the Act
The courts have not held that proof of an agreement to refer
program-related business is a prerequisite to establishing a
violation of section 1128B(b)(2). However, the cases in which
courts have found violations of section 1128B(b)(2) or its
predecessor involve offers of agreements or agreements to refer
program-related business. In each of these cases, the defendants
were found to have purchased referrals through some remuneration
scheme or to have offered to purchase referrals. None of the
cases have found unlawful an offer or payment which is intended to
encourage referrals, but which does not require referrals as a
quid pro quo for acceptance of the offer or payment.
Commonly, the unlawful offer contains a formula pursuant to which
payments will be made based on the value of the business which the
offeree agrees to refer. The courts often, but not always, refer
to such remuneration as a kickback. For example, in United States
v. Duz-Mor Diagnostic Laboratory, Inc., 650 F.2d 223 (9th Cir.
1981), the defendants were convicted of unlawfully offering to pay
remuneration as an inducement for the referral of medical services
that were reimbursable from Medicare and Medi-Cal (the California
Medicaid program) funds. The defendants' unlawful scheme was
found to consist of offering providers a 15 percent rebate in
exchange for the referral of Medicare and Medi-Cal business. 650
F.2d at 227. In United States v. Universal Trade and Industries,
Inc., 695 F.2d 1151 (9th Cir. 1983), the defendants were convicted
of unlawfully offering remuneration to induce a provider to
purchase the defendants' laboratory services. The unlawful scheme
consisted of a disguised kickback to a physician for referrals of
laboratory tests to defendants. Defendants offered to establish a
laboratory in the physician's clinic and to kick back a fixed
percentage of the gross revenues of the laboratory to the
physician. 695 F.2d at 1152-1153. 14/
In United States v. Greber, 760 F.2d 68 (3rd Cir. 1985), the
defendant was convicted for, among other things, unlawfully paying
remuneration to physicians to induce them to refer Medicare
business. The scheme consisted of kicking back a percentage of
each fee that defendant received from Medicare for providing
cardiac monitoring services to the physician who referred the
monitoring request to defendant. Although the court did not focus
on the elements of the agreement between the defendant and
individual physicians, it is apparent that the quid pro quo for
each kickback was a referral. 760 F.2d at 71.
In United States v. Lipkis, 770 F.2d 1447 (9th Cir. 1985), the
unlawful remuneration consisted of kickback payments of
approximately 20 percent of the revenue from referred laboratory
tests. In United States v. Kats, 871 F.2d 105 (9th Cir. 1989),
the unlawful remuneration consisted of an agreement to kick back
50 percent of the Medicare payments received by a laboratory as a
consequence of referrals from a provider. 871 F.2d at 106-107.
Variants of this type of agreement have also been the basis for
convictions for unlawfully offering or paying remuneration.
Although the payment schemes may vary, the common thread of the
cases is that the unlawful schemes are premised on the provider's
agreement to refer program-related business to the payor. For
example, in United States v. Stewart Clinical Laboratory, Inc.,
635 F.2d 804 (9th Cir. 1981), the scheme consisted of offering a
physician free laboratory tests for the physician's private
patients, if that physician agreed to refer his Medi-Cal business
to the defendant laboratory. 652 F.2d at 805. 15/
D. The I.G.'s misplaced reliance on the term "to induce"
Much of the I.G.'s argument as to the meaning of section
1128B(b)(2) focuses on the statutory phrase "to induce."
The I.G. argues that the phrase "to induce" is synonymous with the
phrase "to encourage." Based on this analysis, the I.G. contends
that a party offering to make payments may violate the Act if his
or her intent was to influence another to make referrals even
though the other party has not agreed to make referrals. I.G.'s
Brief at 21. The I.G. argues that unlawful intent may be
discerned by examining the payment a party offers to another to
encourage that party to refer program-related business. According
to the I.G., if the payment is high in relation to the value of
that which is performed by the party who receives the payment and
refers business, then that party has been unlawfully "induced" to
refer business within the meaning of section 1128B(b)(2).
I disagree with the I.G.'s analysis. It does not comport with
what Congress intended to prohibit. It relies on a literal
application of the phrase "to induce" without due regard to the
context in which it is used, legislative history, the maxims of
statutory construction, and judicial decisions which have applied
the Act to specific facts. It incorrectly presumes that the Act
sought to prevent any payments which influenced or encouraged a
provider to refer business, when in fact the Act was directed at
agreements to refer business.
The I.G. asserts that his analysis is supported by several recent
judicial decisions. These include Lipkis, Greber, Kats, and
United States v. Bay State Ambulance and Hospital Rental Service,
874 F.2d 20 (1st Cir. 1989). The I.G. relies on the courts'
statements in these cases that the gravamen of fraud under section
1128B(b)(2) is the inducement factor.
I conclude from my reading of Lipkis, Greber, Kats, and Bay State,
that there are circumstances where a trier of fact may infer the
existence of an agreement to refer program-related business from
the nature and circumstances of a payment. A party who makes
payments in return for referrals of program-related business is
very likely going to disguise these payments in order to evade the
scrutiny of law enforcement officials, including the I.G. These
decisions make it plain that a trier of fact may pierce through a
disguise in order to identify an unlawful payment. The contention
that a payment is ostensibly for a legitimate purpose is not a
defense if that payment is also made as remuneration for
referrals. And if the value of a payment substantially exceeds
the fair market value of that which the payment ostensibly
purchased, then a trier of fact may reasonably infer that the
balance of the payment has been made as remuneration for
referrals. 16/ However, none of these decisions support the
contention that section 1128B(b)(2) proscribes payments which are
made in a context which encourages a party to refer program-
related business, but which are not conditioned on the payee
agreeing to refer program-related business.
In Lipkis, the court found that the fair market value of that
which was given back to the payor by the recipient of payments was
substantially less than the value of the payments. The court
found from this evidence that there was no question that the
payments were being made for referrals as well as for other
services. 770 F.2d at 1449.
However, in Lipkis, the parties had entered into an agreement to
refer business in exchange for kickbacks. 770 F.2d 1449. The
evidence cited by the court is evidence from which the unlawful
agreement was inferred. There is nothing in the Lipkis decision
to suggest that the court intended its holding to stand for the
proposition that section 1128B(b)(2) proscribed payments intended
to encourage referrals.
Close analysis of the Greber decision does not support the I.G.'s
contention that section 1128B(b)(2) prohibits parties from making
payments to encourage referrals. As I note above, the facts of
Greber suggest a scheme to make payments in return for referrals.
There is no finding in the decision that the payments were being
made merely to encourage referrals. The court's statement in
Greber "that the statute is aimed at the inducement factor," 760
F.2d at 71, does not address the question of whether an agreement
is necessary to violate section 1128B(b)(2). Rather, it addresses
the question of whether an unlawful agreement can be inferred from
the circumstances of a payment. The defendant in Greber contended
that if some legitimate purpose existed for the compensation he
paid to physicians (payment for services rendered) then no
violation could be established. He argued that a violation could
only be shown if the sole purpose of payments was to induce
referrals. The court disagreed with this contention, finding that
a party could violate the Act if one purpose of its payments to
another was to induce referrals. 760 F.2d at 72.
The Kats decision is very similar to Greber. The conduct on which
the conviction in Kats was based consisted of an agreement to kick
back Medicare payments. 871 F.2d 105-106. As in Greber, the
defendant argued that his payments could not be construed as
evidence of a violation unless their sole purpose was to induce
the making of referrals. The court disagreed, citing the Greber
decision as authority for its conclusion that a party could
violate the Act if only one purpose of his or her making payments
to another was to induce referrals. 871 F.2d at 108.
As with Lipkis, Kats, and Greber, Bay State does not support an
argument that a party may violate the Act simply by offering or
paying a sum to another to encourage that person to refer program-
related business. Bay State supports the proposition that a party
may violate the Act if that party offers or makes a payment to
another to induce the referral of program-related business,
regardless whether the value of the payment exceeds the value of
what is given by the payee. In one sense, it states a broader
rule of evidence interpretation than is contained in the I.G.'s
assertion that a violation may be inferred if the payment exceeds
that which is obtained in return. However, the main point of Bay
State is that bribes paid to corruptly influence the referral of
program-related business will be a basis for finding a violation
of the Act, even if they are disguised to look like legitimate
payments for services.
The defendant in Bay State was a corporation which provided
ambulance service. The defendant had bid for, and been awarded, a
contract to provide emergency ambulance service to a municipal
government. The defendant had covertly hired as a consultant the
municipal employee who bore principal responsibility for drafting
specifications for the ambulance service contract, for evaluating
bids, and for recommending a bid award. This employee had
recommended that the contract be awarded to the defendant. The
defendant was charged with, and convicted of, unlawfully paying
remuneration for the referral of program-related business. The
defendant argued on appeal that the trial court erred in its
instruction to the jury. According to the defendant, the trial
court should have instructed the jury that it could not convict
unless it found that the payments made by the defendant were not
reasonable payments for the actual services provided by the
municipal employee as part of his consultant relationship.
The United States Court of Appeals for the First Circuit rejected
this argument. It held that a payment made as an inducement to
refer business may evidence a violation of the Act, regardless
whether the value of the payment exceeded the value of that which
was performed by the recipient. 874 U.S. at 29. In reaching its
decision, the court did not specifically address the issue of
whether the municipal employee agreed to influence the bid award
as consideration for his covert consultant arrangement with the
defendant. The facts of the case imply such agreement. The
question of whether a payment made to encourage referrals violates
the Act simply was not an issue in the case.
E. The Secretary's authority to adopt "safe harbor"
regulations
Congress amended the Act in 1987 to authorize the Secretary, in
consultation with the Attorney General, to adopt regulations
specifying payment practices that shall not be treated as criminal
violations of section 1128B(b) and which shall not serve as a
basis for exclusion under section 1128(b)(7). Social Security
Act, section 1128B(b)(3)(D); Pub. L. 100-93, section 14(b)(3).
Although "safe harbor" regulations have been published for
comment, they have not been finally adopted. I draw no
conclusions as to how the Act should be interpreted from the
proposed regulations.
Even when finally adopted, the "safe harbor" regulations would not
serve as a basis for determining what is prohibited by the Act.
The Secretary's authority to declare exceptions to the Act is not
authority to declare conduct to be illegal.
Congress gave the Secretary a limited quasi-legislative authority
to decide whether certain payment practices would be permitted
regardless whether they might violate the Act. Pursuant to
section 1128B(b)(3)(D), the Secretary might decide that a payment
practice should be protected because it satisfies a public policy
objective, irrespective of whether it would otherwise fall within
the statutory prohibition. That determination could be made by
the Secretary without deciding the question of whether the payment
practice is illegal. The fact that the Secretary does not opt to
except a payment practice does not mean that the practice violates
the Act. It means that the Secretary has not chosen, pursuant to
his quasi-legislative authority, to carve out a special protection
for that payment practice.
F. The implications of the I.G.'s interpretation
There are additional compelling reasons for concluding that the
I.G.'s interpretation of section 1128B(b)(2) is incorrect. The
I.G.'s interpretation would, if followed to its logical end,
proscribe payment practices which do not appear to be unethical or
anticompetitive and which are commonplace in the health care
market. See Ha Ex. 33. Furthermore, the I.G.'s interpretation
would, if accepted, result in a law which does not define in
reasonably neutral terms that which is illegal. These
consequences of the I.G.'s
interpretation of the Act are results which Congress did not
intend:
All laws should receive a sensible construction. General
terms should be so limited in their application as not
to lead to injustice, oppression or an absurd
consequence. It will always, therefore, be presumed
that the legislature intended exceptions to its language
which would avoid results of this character.
United States v. Kirby, 74 U.S. 482, 486-487 (1868).
The inexorable consequence of the I.G.'s logic is that any offer
to a health care provider which involves payments which are in any
way intended to encourage that provider to refer program-related
business would violate the Act. A limited partnership joint
venture whose partners' compensation might be indirectly affected
by business they refer to the joint venture's facilities would
appear to be per se illegal. 17/ An agreement among physicians
to jointly own and operate a clinical laboratory would be suspect,
because implicit in such arrangement is the fact that each
participant's compensation would at least indirectly be affected
by the amount of business he referred to the laboratory. An offer
by a hospital to a physician to join a medical staff which
includes any payment, in cash or in kind, would be suspect because
it could be viewed as an inducement to the physician to refer
patients to the hospital. See Ha Ex.36. 18/ A promotional
gift of medications to a physician by a drug company's sales
representative would be suspect, because it could be viewed as an
inducement to the physician to recommend to his patients that they
purchase the drug company's medications. None of these practices
involve agreements to refer business as a condition of the
payment, yet all would be potentially illegal under the I.G.'s
interpretation, because they contain "inducements" to make
referrals.
Congress never suggested that it intended to prohibit any of the
aforesaid practices by its enactment of section 1128B(b). The Act
was directed at agreements which traditionally have been viewed as
unethical or anticompetitive. There may be public policy reasons
to condemn payments which encourage providers to refer program-
related business. However, such payments were not the target of
section 1128B(b).
The I.G. denies that the Act is as sweeping in its prohibitions as
his interpretation implies. At the hearing, the I.G.'s counsel
stated that the Act did not, for example, proscribe per se all
provider-owned health care joint ventures. See Tr. at 1877.
19/ However, the I.G. has never offered any logical basis to
distinguish that which his interpretation impliedly proscribes
from that which he wants to proscribe.
The I.G. contends that the Act provides two ways to distinguish
prohibited from permissible conduct. First, health care providers
may look to future "safe harbor" regulations as guidelines.
Second, a payment will not be suspect if what is paid for is not
excessive in relation to the value of what is received in return
for the payment. These criteria do not provide a meaningful basis
for distinguishing lawful from unlawful payments.
As I note above, the "safe harbor" regulations have not been
adopted. No party can or should be expected to condition his
conduct on the basis of proposals which have not been implemented.
If adopted, these regulations will not determine which conduct is
lawful, apart from the conduct which is specifically excepted from
the reach of the Act by the Secretary. Therefore, they will not
provide a mechanism to predict whether conduct will violate the
Act.
I find no statutory basis for the I.G.'s second criterion. This
formula is not a principled basis to separate lawful from unlawful
conduct so much as it is an artifice to save the I.G. from having
to confront the inevitable consequence of his logic. As I note
above, it depends on a misplaced reliance on the statutory term
"to induce." Congress did not say that the lawfulness of payments
to providers depends on measuring those payments against the value
of items or services provided. Moreover, the I.G.'s second
criterion contradicts his own interpretation of the Act. If
payments which encourage a party to refer business are unlawful,
it should not matter whether the payments are excessive in
relation to other, legitimate, services provided. See my
discussion of Bay State, supra. Any payment made to encourage the
referral of program-related business, no matter how small or
ineffectual, should violate the Act under the I.G.'s analysis.
In any event, the formula advocated by the I.G. is an imprecise
and vague test which fails to provide anyone with a reasonable
basis for determining whether his or her conduct would contravene
the Act. The I.G. never states how much compensation would be too
much compensation under his formula. Under the I.G.'s
interpretation, a party would be forced to continuously measure
the payments he made to another against what he received in return
to assure that the ratio of payments to returns is not too high.
An inefficient entrepreneur who offered low returns on investment
to participants in a joint venture might escape prosecution,
whereas a successful entrepreneur who earned large profits and
paid high returns would be susceptible to prosecution as a result
of his efficiency. Few would risk the prospect of exclusion from
participation (if not criminal prosecution and conviction) in such
an environment. 20/ I suspect that most simply would opt not
to engage in any business transaction which might be construed to
be illegal.
The I.G. asserts that any interpretation of section 1128B(b)(2)
which is narrower than his "inducement equals encouragement"
formula would improperly constrict his discretion to prosecute
violators of the Act. His underlying contention is that Congress
intended the Act to have very broad implications, but left it to
the I.G. to decide as a policy matter how the law is to be
applied. The I.G. argues that I am improperly usurping his policy
making role if I construe the Act more narrowly than he would have
it be construed.
The I.G. mischaracterizes my role in interpreting and applying the
Act. I am not charged with making policy. In adjudicating this
case, I must resolve the parties' contentions as to the meaning of
the Act, and my decision may indirectly have some policy
implications. I am not engaging in policy making by construing
the law more narrowly than the I.G. wants and by identifying the
correct interpretation of the Act nor am I interfering with the
legitimate functions of the I.G. The construction which I have
given to section 1128B(b)(2) is certainly narrower than that which
the I.G. advocates. It is consistent with Congressional intent
and the letter of the Act, as well as with the judicial injunction
that criminal statutes not be construed broadly.
IV. What must be proven to establish a violation under sections
1128B(b)(1) and 1128B(b)(2)
As I note above, sections 1128B(b)(1) and 1128B(b)(2) of the Act
address the two sides of an equation. Section 1128B(b)(1) defines
those circumstances where the recipient of a payment may be found
to have violated the Act. Section 1128B(b)(2) defines those
circumstances where a party who offers or makes a payment may be
found to violate the law.
A. Intent
To violate section 1128B(b)(1), a party must knowingly and
willfully solicit or receive a prohibited payment. To violate
section 1128B(b)(2), a party must knowingly and willfully offer or
make a prohibited payment. The term "knowingly and willfully"
identifies the intent which must necessarily be established in
order to prove a violation. The test for intent was established
in the Kats and Greber decisions as being the intent to do
something prohibited by the Act. It is not necessary under this
test to establish that a party had a specific intent to violate
the Act, nor is it necessary to establish that the sole or even
the primary purpose of the party charged with the violation was to
engage in prohibited conduct. It will suffice to show that one
purpose of a party was to engage in conduct prohibited by the Act.
Greber, 760 F.2d at 69. Even if actions also have a legitimate
purpose other than that which is prohibited, the requisite intent
will be established if one purpose of the actions is to accomplish
something that is prohibited. Id. at 72.
Thus, a party will manifest the requisite intent to violate
section 1128B(b)(1) if that party agreed to accept payments in
return for referring program-related business, even if that party
also accepted the payments for other, lawful, reasons. A party
will manifest the requisite intent to violate section 1128B(b)(2)
if that party offered to make payments, or actually made payments,
for a prohibited purpose, even if that party also made the
payments for other, legitimate reasons. 21/
B. Agreement to refer program-related business
To violate section 1128B(b)(1), a party must knowingly and
willfully solicit or receive remuneration in return for referring
a program-related item or service. As is discussed above, the
meaning of this section is plain. Whatever payment is solicited
or received by the referring party must be intentionally solicited
or received by that party as a condition for that party agreeing
to refer program-related business.
To violate section 1128B(b)(2), a party must knowingly offer or
pay any remuneration conditioned on the recipient of the payment
agreeing to refer program-related business. It will not suffice
to establish a violation to show that payments were offered or
made in the hope that a provider would be encouraged to refer
program-related business.
V. Analysis of Respondents' conduct in the context of section
1128B(b)
The I.G. did not prove that any of Respondents unlawfully received
remuneration from SKBL in return for referring program-related
business, in violation of section 1128B(b)(1) of the Act. The
I.G. did not prove that Respondents Lewand, Tasha, Welsh,
Huntsinger, Keorle, PPCL, Omni, or Placer offered or paid
remuneration for referrals of program-related business in
violation of section 1128B(b)(2) of the Act. The I.G. proved that
Respondents Hanlester, PPCL, Omni, and Placer, by virtue of the
acts of their agent Ms. Hitchcock, offered remuneration for
referrals of program-related business in violation of section
1128B(b)(2) of the Act.
A. Analysis of Respondents' conduct pursuant to section
1128B(b)(1)
In order for me to find that any of Respondents violated section
1128B(b)(1), I must conclude that that Respondent knowingly and
willfully solicited or accepted remuneration from SKBL in return
for referring program-related business. See Part IV A of this
Analysis. The I.G. did not prove that any Respondent solicited or
received remuneration from SKBL. Therefore, the I.G. did not
establish that any Respondent committed a violation of section
1128B(b)(1).
The I.G. argues that Respondents received "indirect" remuneration
from SKBL in return for referring program-related business to
SKBL. As I find above, SKBL made no payments to Respondents. To
the contrary, Respondents PPCL, Omni, and Placer made substantial
payments to SKBL to remunerate SKBL for its management services.
That is not to say that Respondents did not benefit from their
management relationship with SKBL. The management agreements
provided Respondents with substantial advantages, which I have
enumerated in detail in Part II. The I.G. intends his term
"indirect remuneration" to encompass such benefits. But the Act
does not attach liability to parties simply because they benefit
from contracts. In order for there to be a violation under
section 1128B(b)(1), there must be proof that the charged party
solicited or received some payment, in cash or in kind, in return
for agreeing to refer program-related business. The I.G. failed
to prove that Respondents solicited or accepted payments from
SKBL.
Nor did the I.G. prove that Respondents agreed to refer program-
related business to SKBL. The management agreements do not
guarantee SKBL a flow of business from Respondents PPCL, Omni, and
Placer.
B. Analysis of Respondents' conduct pursuant to section
1128B(b)(2)
In order for me to find that any of Respondents violated section
1128B(b)(2), I must conclude that the Respondent knowingly and
willfully offered or gave remuneration to that party to induce
that party to refer program-related business. Implicit in this
section is the requirement that the offer or the payment be
conditioned on the recipient's agreement to refer program-related
business. Unconditional offers or payments do not violate section
1128B(b)(2). See Parts III and IV B of this Analysis.
There is ample evidence that Respondents intended to encourage
limited partners to refer business to the joint ventures. One of
Respondents' central objectives was to capture and profit from the
referrals made by limited partner physicians. As I hold, supra,
Respondents drew an explicit link between referrals and profits.
They made it obvious to limited partners that the limited
partnership laboratories gave limited partners the opportunity to
profit indirectly from that which they could not profit directly.
They made it equally obvious that the limited partnerships would
fail if limited partners did not refer business to the
partnerships' laboratories.
However, the I.G. did not prove that any of Respondents intended
that the sale of limited partnerships in Respondents PPCL, Omni,
and Placer be conditioned on the limited partners agreeing to
refer program-related business to joint venture laboratories.
Respondents did not intend that the sale of shares or the payment
of dividends to individual limited partners be conditioned on the
amount of program-related business that individual limited
partners either agreed to refer or actually referred to to joint
venture laboratories. Respondents did not intend to discipline
partners who failed to refer sufficient business, either by
ousting them from the partnerships or by threatening to oust them.
Nor is there evidence that Respondents paid dividends to
individual limited partners based on the volume of their
referrals. To the contrary, the evidence establishes that what a
limited partner received depended entirely on his ownership share
as a percentage of those joint venture profits which were set
aside for distribution to limited partners. Finally, the I.G. did
not prove that Respondents actually disciplined partners by
ousting those who failed to refer sufficient business to joint
venture laboratories.
There is a clear distinction, however, between what Respondents
intended and what Ms. Hitchcock said on their behalf. Ms.
Hitchcock implied to prospective limited partners that their
eligibility to purchase shares in Respondents PPCL, Omni, and
Placer depended on their agreement to refer program-related
business. She told them explicitly that the number of shares that
they would be permitted to purchase would depend on the amount of
business they were able and willing to refer. She told them that
partners who did not refer business would be pressured to leave
the partnerships.
These representations by Ms. Hitchcock were made in the course of
a sales pitch in which she promised prospective limited partners
large profits and little or no investment risk. When considered
in context, Ms. Hitchcock's representations constitute knowing and
willful offers of remuneration to induce physicians to refer
program-related business.
1. Liability of Respondents Hanlester, PPCL, Omni, and
Placer for the acts of their agent Ms. Hitchcock
There was an explicit agency relationship between Ms. Hitchcock
and Respondent Hanlester. Ms. Hitchcock also was the agent of
Respondents PPCL, Omni, and Placer. She represented herself to be
the agent of both Hanlester and the limited partnership
Respondents. Finding 92. Nothing contained in Respondents' sales
material suggested otherwise.
The Act applies to entities as well as to individuals. Section
1128B(b) broadly applies to "whoever" commits a proscribed
offense. The term "whoever" is sweeping enough to apply to any
form of business organization, including partnerships. It is
apparent from the Act's legislative history that Congress was
concerned not just with individuals who offered, paid, or received
proscribed remuneration, but with entities as well. See Part III
A of this Analysis. Courts have applied the Act to entities,
including corporations. See, e.g., United States v. Universal
Trade and Industries, Inc., 695 F.2d 1151 (9th Cir. 1983).
The Secretary's authority to impose a civil remedy against a party
who violates section 1128B(b) derives from section 1128(b)(7),
which applies to "any individual or entity" whom the Secretary
determines has committed an act described in section 1128B.
Section 1128(b)(7) therefore engrafts onto section 1128B its own
definition of who may be subject to a civil remedy for violation
of section 1128B. Congress sought to apply section 1128(b)
broadly, as is apparent from its use of the term "any individual
or entity" to define those who fell within the scope of the
section. I conclude that the reach of section 1128(b) extends to
include partnerships, as well as individuals and corporations.
Under section 1128B(b), an entity such as a partnership may be
liable for the acts of its agents. It is a settled principle of
federal law that a partnership may be held criminally liable for
the acts of its agents. United States v. A & P Trucking Company,
358 U.S. 121 (1958). In A & P Trucking, the United States Supreme
Court found that a partnership could be found criminally liable
for the acts of its agent, based on the doctrine of respondeat
superior. 358 U.S. at 125. In that case, the Court addressed the
policy which
underlies the need to hold entities, including partnerships,
responsible for the acts of their agents:
The business entity cannot be left free to break the law
merely because its owners . . . do not personally
participate in the transaction. The treasury of the
business may not with impunity obtain the fruits of
violations which are committed knowingly by agents of
the entity in the scope of their employment. Thus
pressure is brought on those who own the entity to see
to it that their agents abide by the law.
358 U.S. at 126.
Identical considerations apply here. In these cases, Respondents
Hanlester, PPCL, Omni, and Placer permitted their agent Ms.
Hitchcock to engage in conduct which was within the scope of her
agency relationship and which violated section 1128B(b)(2). In
engaging in such conduct, Ms. Hitchcock committed Respondents
Hanlester, PPCL, Omni, and Placer to a course of action even
though such action was not authorized by these Respondents'
principals. I conclude that these Respondents are liable for her
acts based on the principles of respondeat superior.
2. Liability of Respondents Lewand, Tasha, Welsh,
Huntsinger, and Keorle for the acts of Ms. Hitchcock
The I.G. argues that, pursuant to the law of agency, derivative
liability may attach from a partnership to an individual partner.
Therefore, according to the I.G., Respondents Lewand, Tasha,
Welsh, Huntsinger, and Keorle must be held accountable for the
unlawful conduct of Respondents Hanlester, PPCL, Omni, and Placer,
even if there is no proof that Respondents Lewand, Tasha, Welsh,
Huntsinger, and Keorle personally engaged in or authorized
proscribed conduct.
I disagree with the I.G.'s contention. A party may not be found
to have violated section 1128B(b) without a showing of necessary
intent. Liability does not attach to a party under section
1128B(b) simply because that party is a principal in an entity
which has been found to have violated the Act.
A party cannot be found to have violated section 1128B(b) absent
proof that that party knowingly and willfully engaged in
proscribed conduct. It is not sufficient evidence to hold a party
accountable to show that an entity in which a party has some
ownership interest engaged in proscribed conduct. More must be
proved. At a minimum, it must be shown that the party charged
with the violation approved of or directed the proscribed
conduct. 22/
The fact that a party has an interest in an entity which engages
in criminal conduct is not a sufficient basis to find that party
liable for the criminal conduct. Nor may a shareholder or a
partner in an entity be found criminally liable based only on
actions of the entity's agent, absent proof that the shareholder
or partner authorized or approved the agent's actions. That is
not to say that the acts of an agent are irrelevant to the
ultimate issue of liability. The agent may execute an unlawful
plan. The agent's acts may therefore prove a plan's
implementation. However, the relationship between an agent of an
entity and a partner in that entity is on its face too remote to
conclusively presume that the agent's acts were authorized or
approved by the partner.
This analysis is in accord with principles of federal criminal law
which require that scienter must ordinarily be established as a
prerequisite to a finding of guilt. In the A & P Trucking Company
case, the Supreme Court observed that a partner could not
personally be held liable for the criminal acts of a partnership
absent proof that the partner was personally responsible for those
acts. 358 U.S. at 127. Thus, an entity may be held criminally
liable based on the criminal acts of an agent acting within the
scope of his or her agency, whereas the agent's acts are not, in
and of themselves, sufficient grounds to hold a principal of the
entity criminally liable. Id.
The I.G. has cited a number of decisions to support his argument
that partners in Respondent Hanlester should be held liable under
section 1128B(b)(2) based on a finding that Respondent Hanlester
violated the Act. The cases cited by the I.G. are civil cases.
While they may support the proposition that in civil actions, a
partner may be liable for the wrongful acts of his partnership,
they do not establish that the same principle applies under
federal criminal law. See, e.g., Danzig v. Jack Grynberg &
Associates, 161 Cal. App. 3d 1128, 208 Cal. Rptr. 336 (1984).
It is true that this is a civil remedies proceeding, not a
criminal case. However, in order to establish that authority
exists to exclude a party under section 1128(b)(7), the I.G. must
prove that the party "committed an act which is described" in
section 1128B. Social Security Act, section 1128(b)(7). The
import of this language is that the I.G. must prove that a party
has committed an act which would violate section 1128B, in order
to establish authority to impose a remedy under section
1128(b)(7). The standard for liability under section 1128B is
criminal, not civil. The I.G. fails to meet the criminal
liability standard of section 1128B by proving only that a party
has engaged in conduct which might meet a civil liability
standard.
Here, the evidence does not show that Respondents Tasha, Welsh, or
Keorle, acting as principals in Respondent Hanlester, approved or
directed the acts of Respondents Hanlester, PPCL, Omni, and Placer
which violated section 1128B(b)(2). The unlawful acts were caused
by an agent who acted contrary to their direction. Therefore,
these Respondents are not personally liable for the unlawful
conduct of Respondents Hanlester, PPCL, Omni, and Placer which
resulted from the Ms. Hitchcock's acts.
Several of Respondents against whom the I.G. seeks to attach
derivative liability were not in fact principals in Respondent
Hanlester. None of them were principals in Respondents PPCL,
Omni, or Placer. 23/ Respondent Lewand had no direct interest
in Respondent Hanlester. Respondent Huntsinger owned no interest
in Respondent Hanlester. Neither Respondents Lewand, Tasha,
Welsh, Huntsinger, or Keorle were principals in Respondents PPCL,
Omni, or Placer. Thus, even if the I.G.'s theory of liability
were correct, liability would not attach to Respondents Lewand and
Huntsinger as principals in Respondent Hanlester, or against
Respondents Lewand, Tasha, Welsh, Huntsinger, or Keorle as
principals in Respondents PPCL, Omni, or Placer. 24/
Finally, I conclude that Respondent Huntsinger cannot be held
liable as an agent of Respondents PPCL, Omni, and Placer for the
conduct of his co-agent, Ms. Hitchcock. I am unaware of any
authority which would hold an employee or an agent criminally
liable for the conduct of a co-worker, absent proof that the
employee or agent personally participated in the unlawful conduct.
3. Liability of Respondents Lewand, Tasha, Welsh,
Huntsinger, and Keorle for their statements and acts
The I.G. did not prove that Respondents Lewand, Tasha, Welsh,
Huntsinger, or Keorle knowingly and willfully offered or paid
remuneration to limited partners in Respondents PPCL, Omni, or
Placer to induce them to refer program-related business, in
violation of section 1128B(b)(2). Therefore, based on their
statements and conduct, these Respondents are not liable for
violating section 1128B(b)(2).
I have considered the question of these Respondents' liability
under section 1128B(b)(2), both in light of evidence concerning
their statements and conduct and evidence as to the nature of the
offers and payments they made or directed be made to limited
partners in Respondents PPCL, Omni, and Placer. The I.G. did not
prove that these Respondents' statements establish unlawful
intent or acts. See my discussion of each of these Respondents'
statements at subparts a. through e., infra. Nor can unlawful
intent or acts be concluded from the dividends paid to limited
partners in Respondents PPCL, Omni, or Placer.
As I note at part III D of this Analysis, there are circumstances
where an unlawful agreement to refer program-related business may
be inferred from the nature of the payments which are offered or
made to health care providers. Greber, 760 F.2d at 72. A bribe
may be disguised as a legitimate consulting fee, as was the case
in Bay State, 874 F.2d at 29. Kickbacks or rebates may be
disguised as rent for facilities, consulting fees, or dividends.
Payments which bear no legitimate relationship to that which is
received in return are suspect.
The payments which Respondents offered and made to limited
partners in Respondents PPCL, Omni, and Placer do not prove
unlawful agreements to refer business. Certainly, Respondents
structured the terms of participation in Respondents PPCL, Omni,
and Placer to make it highly attractive for physicians to
participate. It is obvious, as I have observed supra, that
Respondents needed these physicians to refer tests to the joint
ventures' laboratories in order for the laboratories to succeed.
However, the manner in which Respondents compensated limited
partners does not suggest that there was a hidden condition of
participation consisting of a requirement that these partners
refer business. Payments were made to limited partners whether or
not those partners referred business to the laboratories.
Payments were made based on the partners' equitable ownership
shares and were not based on the amount of business that partners
referred. Payments were made based on the laboratories' revenues.
Thus, the payments made to individual limited partners in
Respondents PPCL, Omni, and Placer do not establish a nexus
between the referrals made by the individual partners and the
compensation each of them received. Absent such nexus, I cannot
infer an unlawful agreement to remunerate partners for referrals.
The I.G. did not prove that the structure of Respondents PPCL,
Omni, and Placer demonstrated a fraudulent intent. The business
decisions made by Respondents are explained by legitimate business
and efficiency considerations. The joint venture laboratories, in
their structure and operation, resembled joint ventures commonly
established in the health care market. As the I.G.'s own expert,
Mr. Kelly, admitted, these joint ventures were a "generic type of
limited partnership." Tr. at 181. The returns that the limited
partnerships offered and paid to partners were not unusually high.
Tr. at 209.
a. Respondent Lewand
The I.G. did not prove that Respondent Lewand told physicians that
they would be permitted to purchase joint venture shares if they
agreed to order tests from joint venture laboratories. Nor did he
prove that Respondent Lewand conditioned the number of shares that
were sold to any physician on the amount of business that
physician agreed to refer. The I.G. did not prove that Respondent
Lewand threatened to oust those partners who did not refer
business, nor did the I.G. prove that Respondent Lewand authorized
the ouster of partners who did not refer business. See Part II D
of this Analysis.
The only evidence the I.G. offered concerning statements that
Respondent Lewand may have made linking ownership of joint venture
shares to an agreement to refer business to a joint venture is the
testimony of Dr. Bond, which I discuss at Part II D of this
Analysis. For the reasons which I have expressed, I am not
persuaded that this evidence establishes that Respondent Lewand
engaged in conduct which violated the Act.
b. Respondent Tasha
The evidence offered by the I.G. concerning Respondent Tasha is
similarly unpersuasive. As is described in Part II D, there was
conflicting and equivocal testimony from some witnesses that
Respondent Tasha said that partners who did not refer business to
joint venture laboratories would be ousted from the partnerships.
That evidence was weakened by its imprecision and was outweighed
by Respondent Tasha's credible denial that he made such
statements. I conclude that the I.G. did not prove that
Respondent Tasha conditioned ownership of shares in Respondents
PPCL, Omni, and Placer on physicians agreeing to refer business.
Nor did the I.G. prove that Respondent Tasha authorized the ouster
of partners because those partners had failed to refer sufficient
business to joint venture laboratories.
c. Respondent Welsh
There is no credible evidence to prove that this Respondent
engaged in acts prohibited by section 1128B(b). Respondent Welsh
was involved with Respondent Hanlester and the marketing of
limited partnership shares in Respondent PPCL only until the
Summer of 1987. He actively participated in the formation of
Respondent PPCL and the marketing of this joint venture's shares.
There is no credible evidence that he ever told prospective
partners that they must agree to refer business as a condition for
purchasing shares, or that he conditioned the number of limited
partnership shares which were offered to any prospective limited
partner on the amount of business that that physician agreed to
refer to a joint venture laboratory. There is no evidence to link
Respondent Welsh to the administration of Respondent Hanlester or
Respondent PPCL.
d. Respondent Keorle
The I.G. did not prove that Respondent Keorle violated section
1128B(b)(2). Respondent Keorle is the successor in interest to
Hanlester Corporation. Hanlester Corporation was a majority owner
of Respondent Hanlester prior to January 1989 and was in part
owned by Respondent Lewand.
The I.G. offered no evidence to show precisely what role Hanlester
Corporation played in the management of Respondent Hanlester. It
is reasonable to infer that the management decisions of this
corporation were the same as management judgments made by
Respondent Lewand. The I.G. offered nothing to prove that
Hanlester Corporation ever conditioned ownership of shares in
Respondents PPCL, Omni, or Placer on purchasers agreeing to refer
program-related business. Nor did the I.G. prove that Hanlester
Corporation conditioned the number of shares a limited partner
could buy on the amount of business that partner agreed to refer
to a joint venture laboratory. The I.G. offered no evidence to
show that Hanlester Corporation ever threatened to oust, or
actually ousted, limited partners who failed to refer business to
joint venture laboratories.
e. Respondent Huntsinger
The I.G. did not prove that Respondent Huntsinger told prospective
limited partners in Respondents PPCL, Omni, or Placer that they
would be permitted to purchase shares if they agreed to refer
program-related business to joint venture laboratories. The I.G.
did not prove that Respondent Huntsinger conditioned the number of
shares that a prospective partner could purchase on the amount of
business that that prospective partner was willing to refer.
The I.G. offered substantial testimony to show that, in his
capacity as medical director of Respondents PPCL and Omni,
Respondent Huntsinger called limited partners and asked them why
they were not ordering more tests from joint venture laboratories.
Respondent Huntsinger's tone and the substance of these inquiries
was plainly considered to be obnoxious by some of the limited
partners. At least a few of these telephone conversations
degenerated into confrontations.
However, the evidence does not establish that Respondent
Huntsinger threatened limited partners with removal for failure to
refer business, nor does it establish that Respondent Huntsinger
or other Respondents ousted these partners because they had failed
to refer business. See Analysis at Part II D. Respondent
Huntsinger's communications with limited partners, no matter how
obnoxious or irritating these partners may have considered them to
be, did not violate section 1128B(b)(2).
VI. Remedy
The I.G. requested that I impose and direct exclusions against
Respondents from participating in Medicare and Medicaid. The
length of the proposed exclusions varies from three years for
Respondent Welsh to permanent exclusions for Respondents PPCL,
Omni, and Placer. I do not have authority to impose and direct
exclusions against those Respondents whom I have found did not
violate section 1128B(b) (Respondents Lewand, Tasha, Welsh,
Keorle, and Huntsinger). No remedial purpose would be served by
imposing and directing exclusions against those Respondents whom I
have found to have violated section 1128B(b)(2) (Respondents
Hanlester, PPCL, Omni, and Placer). Therefore, I decline to
impose and direct exclusions against any Respondent.
The I.G. brought these cases pursuant to section 1128 of the Act.
Section 1128(b)(7) gives the Secretary the authority to exclude
individuals or entities whom he has determined have violated
sections 1128A or 1128B. No exclusion may be imposed pursuant to
section 1128(b)(7) unless a finding has been made that the
respondent has violated either section 1128A or 1128B.
I have found that four of the Respondents, Respondents Hanlester,
PPCL, Omni, and Placer, violated section 1128B(b)(2). Authority
exists to exclude each of these Respondents. The question which
remains is whether an exclusion of any of these Respondents is
needed to satisfy the remedial purposes of section 1128.
Section 1128 is a civil remedies statute. The remedial purpose of
section 1128 is to enable the Secretary to protect federally-
funded health care programs and their beneficiaries and recipients
from individuals and entities who have proven by their misconduct
that they are untrustworthy. Exclusions are intended to protect
against future misconduct by providers. See Berney R. Keszler
M.D. et al., DAB Civ. Rem. C-167 at 32 (1990).
Federally-funded health care programs are no more obligated to
continue to deal with dishonest or untrustworthy providers than
any purchaser of goods or services would be obligated to deal with
a dishonest or untrustworthy supplier. The exclusion remedy
allows the Secretary to suspend his contractual relationship with
those providers of items or services who are dishonest or
untrustworthy. The remedy therefore enables the Secretary to
assure that federally-funded health care programs will not
continue to be harmed by dishonest or untrustworthy providers of
items or services. See Keszler at 32 - 33. The exclusion remedy
is therefore closely analogous to the civil remedy of termination
or suspension of a contract to forestall future damages from a
continuing breach of that contract.
Exclusion may have the ancillary benefit of deterring providers of
items or services from engaging in the same or similar misconduct
as that engaged in by excluded providers. See Keszler at 33.
However, the primary purpose of an exclusion is the remedial
purpose of protecting the trust funds and beneficiaries and
recipients of those funds. Deterrence cannot be a primary purpose
for imposing an exclusion. Where deterrence becomes the primary
purpose, section 1128 no longer accomplishes the civil remedies
objectives intended by Congress. Punishment, rather than remedy,
becomes the end.
[A] civil sanction that cannot fairly be said solely to
serve a remedial purpose, but rather can be explained
only as also serving either retributive or deterrent
purposes, is punishment, as we have come to understood
the term.
United States v. Halper, 490 U.S. 435, 448 (1989).
Therefore, in order to be adjudged reasonable under section 1128,
an exclusion must satisfy the remedial objective of protecting
federally-funded health care programs and their beneficiaries and
recipients from untrustworthy providers of items or services. An
exclusion which satisfies this purpose may also have the ancillary
benefit of deterring wrongdoing; however, that ancillary benefit
will not sustain an exclusion where the exclusion does not
reasonably serve the Act's remedial objective.
The I.G. argues that Congress intended that individuals and
entities who are found to have committed acts in the nature of
criminal offenses related to federally-funded health care programs
should be excluded for substantial periods. As a general
proposition, I agree that inferences as to parties'
trustworthiness can be drawn from the conduct that they are found
to have committed. In most circumstances, where a party is found
to have committed misconduct in the nature of a program-related
crime, the inference can be drawn that that party is untrustworthy
and should be excluded. See Keszler at 38; Tommy G. Frazier and
Prater Drugs, DAB Civ. Rem. C-127 at 23 (1990); Anesthesiologists
Affiliated et al. and James E. Sykes, D.O., et al., DAB Civ. Rem
C-99, C-100 at 58 (1990).
Furthermore, Congress has determined that parties who are
convicted of crimes related to the delivery of an item or service
under Medicare or Medicaid must be excluded for at least five
years. Social Security Act, sections 1128(a)(1), (c)(3)(B). Had
Respondents Hanlester, Omni, PPCL, and Placer been convicted of
violating section 1128B(b)(2) in a criminal proceeding, then
arguably they would have been convicted of a program-related
crime, and the I.G. would have had no choice but to exclude them
for at least five years. Given this, the mandatory exclusion
provisions of sections 1128(a)(1) and (c)(3)(B) must be considered
guidance as to what would comprise a reasonable exclusion for
individuals and entities who are found in a civil remedies
proceeding to have engaged in conduct which is in the nature of a
program-related crime.
Guidance in measuring the reasonableness of an exclusion is also
found in regulations contained in 42 C.F.R. Part 1003. These
regulations apply to exclusions imposed pursuant to the Civil
Monetary Penalties Law, Social Security Act section 1128A, and are
not specifically applicable to cases under section 1128B.
However, they express the Secretary's policy as to exclusions in
circumstances which are not distinguishable from the present
cases. Therefore, these regulations must be considered as
nonbinding guidelines. 25/ These regulations enumerate a
number of factors which should be considered in deciding whether
to impose an exclusion, and in deciding how long an exclusion
should be. They include: the nature of the conduct which
resulted in a finding of violation, 42 C.F.R. 1003.106(b)(1); the
degree of culpability manifested by a party, 42 C.F.R.
1003.106(b)(2); whether a party has a prior history of offenses,
42 C.F.R. 1003.106(b)(3); the party's financial condition, 42
C.F.R. 1003.106(b)(4); and other matters as justice may require,
42 C.F.R. 1003.106(b)(5).
I conclude from applying all of these criteria and guidelines to
the facts of these cases that no remedial purpose would be served
by imposing exclusions against Respondents Hanlester, PPCL, Omni,
and Placer. The offenses which I have found in these cases are of
a nature that would ordinarily support an exclusion, and indeed,
might mandate one if Respondents Hanlester, PPCL, Omni, and Placer
had been convicted of a criminal offense pursuant to section
1128B(b)(2). However, there are unique circumstances here which
preponderate against imposing an exclusion. The evidence
establishes that these Respondents' liability emanates entirely
from the misconduct of one individual, Ms. Hitchcock. These
Respondents were demonstrably untrustworthy so long as Ms.
Hitchcock represented them. The problems created by Ms.
Hitchcock's agency, and Respondents' untrustworthiness, ended when
Respondent Hanlester and Ms. Hitchcock parted company. No
legitimate end would now be served by excluding Respondents
Hanlester, PPCL, Omni, and Placer more than two years after their
relationship with Ms. Hitchcock ended.
I would reach a different conclusion concerning the need for
exclusions in these cases if I determined that Respondents
manifested a propensity for hiring untrustworthy agents and
employees, or that Respondents were indifferent to the
consequences of their agents' acts. However, the evidence shows
that Respondents Hanlester, PPCL, Omni, and Placer were concerned
that their agents not make improper representations. Mr.
Apprehamian repeatedly counseled Ms. Hitchcock not to make
representations beyond what was contained in the private placement
memoranda for Respondents PPCL, Omni, and Placer. That counseling
was reinforced by Respondents Lewand and Tasha. Eventually,
Respondent Lewand concluded that Ms. Hitchcock was uncontrollable.
He had determined to discharge her when she resigned.
Application of the regulatory principles of 42 C.F.R. 1003.106 to
these cases suggests that there is no need for exclusions here.
The conduct of Respondents Hanlester, PPCL, Omni, and Placer which
is the basis for my finding that section 1128B(b)(2) was violated
is attributable to one individual, Ms. Hitchcock. This conduct
was contrary to Respondents' intent and their policy. See 42
C.F.R. 1003.106(b)(1). Respondents, as distinguished from their
agent, Ms. Hitchcock, manifest little culpability. See 42 C.F.R.
1003.106(b)(2). None of Respondents has a history of prior
offenses. See 42 C.F.R. 1003.106(b)(3). 26/
There is no evidence that Respondents Hanlester, PPCL, Omni, or
Placer caused harm to the Medicare or Medicaid programs. See 42
C.F.R. 1003.106(b)(5). Bribes, kickbacks, rebates, and other
forms of proscribed remuneration carry the potential for
substantial harm to federally-funded health care programs and to
beneficiaries and recipients. Such unlawful inducements may
encourage providers to order unnecessary items or services in
order to obtain remuneration. Unlawful inducements may also cause
providers to make choices which are not in the best interests of,
and which are even potentially harmful to, persons whom they are
entrusted to treat. The potential for such harm is one of the
principal reasons Congress enacted section 1128B. However, there
is no evidence in this case to prove such harm actually resulted
from the limited partners' participation in Respondents PPCL,
Omni, and Placer. For purposes of deciding a remedy, I am not
prepared to find the presence of harm based solely on the
potential for such harm.
CONCLUSION
For the reasons set forth in this Decision, I conclude that
Respondents Hanlester, PPCL, Omni, and Placer knowingly and
willfully offered remuneration to physicians to induce them to
refer program-related business in violation of section 1128B(b)(2)
of the Act. I conclude that the I.G. did not prove that
Respondents Lewand, Tasha, Welsh, Huntsinger, or Keorle knowingly
and willfully offered or paid remuneration to physicians to induce
them to refer program-related business in violation of section
1128B(b)(2) of the Act. I conclude that the I.G. did not prove
that any of Respondents solicited or received remuneration in
return for referring program-related business in violation of
section 1128B(b)(1) of the Act. Finally, I conclude that no
legitimate remedial purpose would be served by excluding
Respondents Hanlester, PPCL, Omni, and Placer from participating
in Medicare or Medicaid.
__________________________
Steven T. Kessel
Administrative Law Judge
* * * Footnotes * * *
1. "State health care program" is defined by section
1128(h) of the Social Security Act to cover three types of
federally-assisted programs, including State plans approved under
Title XIX (Medicaid) of the Act. I use the term "Medicaid"
hereafter to represent all State health care programs encompassed
by the I.G.'s proposed exclusion of Respondents.
2. The parties' exhibits and the transcript of the
proceedings in these cases will be cited as follows:
Inspector General Exhibit I.G. Ex. (number)/(page)
Respondents Hanlester,
Keorle, PPCL, Omni, Placer,
Lewand, Tasha Exhibit Ha. Ex. (number)/(page)
Respondent Welsh Exhibit We. Ex. (number)/(page)
Respondent Huntsinger Exhibit Hu. Ex. (number)/(page)
Transcript Tr. at (page)
3. SKBL's relationship to Respondents is discussed in
detail, infra. See Findings 143 - 186, 201, 202, 204.
4. The exception to this law was the situation where a
laboratory referred a test to another laboratory. In that case,
either the laboratory which performed the test or the laboratory
which referred it was permitted to claim reimbursement from
Medicare. Social Security Act, section 1833(h)(5)(A)(ii).
5. I find that both Respondents Lewand and Mr.
Aprahamian were credible witnesses.
6. In one memorandum, Ms. Hitchcock reiterated to a
physician that she had offered "each physician . . . (apparently
members of that physician's group practice) 3 units with the
exception that all pathology come to the lab also - in that case I
could probably sell you up to 5 units each." I.G. Ex. 72.4.
There is no evidence that Ms. Hitchcock showed this memorandum to
any of Respondents.
7. On cross-examination, Respondent Huntsinger
testified that he was present when Respondent Lewand made the
statement. His recollection was that Respondent Lewand:
(S)tated clearly that the partnership, per se, could not do
anything against a partner that didn't want to produce
any work, that we were -- our hands were tied.
Tr. at 2361 - 2362.
8. The I.G. also introduced the affidavit of a fourth
physician, Dr. Martin, and an interview report of Dr. Martin which
was prepared by an I.G. special agent. I.G. Ex. 104.0. I attach
little weight to these documents. Dr. Martin was not called to
testify by the I.G. In his affidavit, Dr. Martin says that
Respondent Huntsinger implied that he would be "dropped" from
Respondent PPCL because of his failure to order sufficient tests.
However, Dr. Martin does not provide his recollection of what
Respondent Huntsinger said, as opposed to the implications of what
Respondent Huntsinger said.
9. Although distributions were made on the "accrual"
system throughout the life of the management agreements, there was
no evidence offered by the parties as to whether the total of
these distributions exceeded the total collections of laboratory
revenues for services ordered from the joint ventures. Nor was
evidence offered to show whether, at some point, SKBL and any of
Respondents engaged in an effort to balance what had been
distributed against what had actually been collected.
10. I am not suggesting by this distinction that
Congress always regards as benign actions that influence provider
choice. As I shall discuss, infra, Congress has opted to prohibit
such actions in some circumstances.
11. The section which applied to the Medicare program
was contained in section 1877(b) of the Act. Identical language
which applied to Medicaid was contained in section 1909(b).
12. One commentator has concluded that the term "any
remuneration" in section 1128B meant payment in return for a
service, loss, or expense. Yoakum, Physician Fraud in the
Medicare-Medicaid Programs -- Kickbacks, Bribes and Remunerations,
10 Memphis State University L. Rev. 684, 693 (1980).
13. In United States v. Bay State Ambulance and
Hospital Rental Service Inc., 874 F.2d 20 (1st Cir. 1989), the
court stated as dicta that "(C)ongress meant the crimes to have
the same elements for payor and payee." 874 F.2d at 34.
14. The I.G. relies on the Universal Trade decision
as addressing the broad scope of the statutory term
"remuneration." See I.G.'s Brief at 18. He characterizes the
offense found by the court as being grounded on a laboratory's
"making net profit distributions to the owner of a clinic that
made referrals to the lab." Id. What was at issue in Universal
Trade was an agreement to pay kickbacks for referrals. The
parties explored various mechanisms to disguise that unlawful
agreement. In the final analysis, the violation of the Act was
premised on the agreement, not on the artifices which the parties
used to disguise it. 695 F.2d at 1152 - 1153.
15. This case was reversed on other grounds.
16. That does not mean, however, that "excessive"
compensation proves a violation of the Act or that a violation may
be presumed from "excessive" compensation. A reasonable inference
may be drawn from payment which exceeds the value of that which
ostensibly has been purchased that something unstated has been
purchased as well. However, there may be benign explanations for
the payment, which could negate the inference.
17. For example, under the I.G.'s interpretation, any
offer to a physician to invest in a joint venture laboratory would
violate section 1128B(b)(2) if the offeror told the physician that
his or her investment return from the laboratory would be affected
by the referrals the physician made to the laboratory. I am
skeptical that this relationship between investment return and
referrals is not routinely communicated to potential physician
partners in joint venture clinical laboratories. An obvious
reason for such laboratories is that their participants stand to
profit from referrals. Joint venture clinical laboratories enable
physicians to profit from the Medicare-reimbursed laboratory tests
that they order. The Act prohibits physicians from claiming
reimbursement from Medicare for tests performed by independent
laboratories. Social Security Act, section 1833(h)(5)(A).
18. Indeed, the act of taking a prospective hospital
medical staff member to lunch could be interpreted to be an
unlawful inducement.
19. However, the I.G. asserts in his Reply Brief
that:
The term `any remuneration' is not limited to payments that
are similar to bribes, kickbacks, and rebates. It is a
broad term, meaning the transfer of anything of value in
any form or manner whatsoever. The term `to induce'
does not require that the recipient has agreed to make
any referrals to the payor. It means that the payor
attempts or seeks to influence or persuade the recipient
to make referrals.
I.G.'s Reply Brief at 99. The I.G. has not shown how this formula
would not render per se illegal virtually all health care joint
ventures, as well as most promotional activities directed towards
providers of health care items or services by those who seek to
attract their business.
20. As I note supra, an inference of an unlawful
agreement may be drawn in some cases from the circumstances of a
payment. But that does not mean that a case can be decided simply
by comparing the payment with that which is received in return for
the payment.
21. A more detailed explication of the intent
standard is contained in my May 8, 1990 Ruling.
22. For example, had the I.G. proven that any of
Respondents directed or authorized Ms. Hitchcock to make unlawful
representations to prospective limited partners, then the I.G.
would have established that that Respondent had violated the Act.
Liability would be premised on that Respondent's conduct and
intent, and not on his status as a principal in Respondents
Hanlester, PPCL, Omni, or Placer.
23. Respondent Lewand was an owner of Hanlester
Corporation, which, at one time, was a principal in Respondent
Hanlester.
24. Furthermore, Respondent Welsh ceased being a
principal in Respondent Hanlester in the Summer of 1987. Finding
12. Hanlester Corporation, the predecessor to Respondent Keorle,
was a principal in Respondent Hanlester. However, it sold its
interest in January 1989. There is no theory of liability which
would make either Respondents Welsh or Keorle liable for acts
occurring after they ceased to be principals in Respondent
Hanlester.
25. There are proposed regulations which, if adopted
by the Secretary, would establish his policy for exclusions
imposed pursuant to section 1128. See 55 Fed. Reg. 12205 (April
2, 1990). These proposed regulations have not been adopted. It
would not be appropriate for me to consider them as guidelines,
because they may not be finally adopted in their current form.
Additionally, it is not clear that, assuming these proposed
regulations are adopted, they would apply retroactively to
exclusion cases heard prior to the date of their adoption.
26. Respondents offered evidence to show that their
interpretation of the Act is consistent with that advocated at
times by various commentators including Departmental officials.
The purpose of this evidence is to prove that Respondents believed
that their conduct was legal. From this, Respondents argue that
they are not untrustworthy health care providers. I make no
findings as to this evidence because I conclude that the I.G. did
not prove that Respondents Lewand, Tasha, Welsh, Huntsinger, and
Keorle violated the Act and because I conclude that Respondents
Hanlester, PPCL, Omni, and Placer are not untrustworthy for the
reasons I cite in the body of this Decision.